Dell Technologies Inc. (NYSE: DELL) suffered a 9% stock drop on Monday, January 27, amid concerns sparked by DeepSeek’s affordable AI chatbot. This emerging technology has disrupted the industry, posing a significant threat to U.S. tech leaders and raising questions about the long-term viability of AI infrastructure investments. Nvidia’s stock(NASDAQ: NVDA) also felt the ripple effect, and plummeted 17% on the same day. See Why Is DeepSeek Sinking Nvidia Stock?
Chinese AI DeepSeek has open-sourced its R1 model, which has been shown to outperform leading models from OpenAI and Meta in various benchmarks. What’s more, this breakthrough technology is not only freely available but also offers a cost-efficient solution that requires fewer computing resources, making it an attractive proposition for the industry. The situation could have particular significance for Dell’s stock, as they’ve emerged as a key player in AI servers.
Dell’s revenue streams are diversified, with roughly half derived from personal computers (PCs) sales and related products, while the remaining half comes from its robust infrastructure business, including servers, where the company holds a dominant market position. While Dell’s Q3 sales grew 10% year-over-year (y-o-y) to $24.4 billion, the company’s client solutions group experienced a 1% y-o-y decline in revenue to $12.1 billion. Consumer sales within this segment plummeted 18% y-o-y. However, Dell’s infrastructure business emerged as a bright spot, growing 34% y-o-y to $11.4 billion – with server and networking revenue surging 58% y-o-y to $7.4 billion. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
What Does This Mean For DELL Stock?
Dell’s investment in AI servers is poised to drive substantial growth in its infrastructure business, as the AI server market is projected to exceed $200 billion by 2029. While AI-powered servers are typically low-margin, the sheer scale of the market presents a compelling growth opportunity. This growth will likely be complemented by increasing revenue from AI-optimized PC sales on the consumer side.
While Dell’s revenues may be held back somewhat by the struggling PC segment, a substantial PC upgrade cycle is anticipated in 2025. The current economic climate and rising inflation have led to delayed tech upgrades. However, the availability of AI-enabled PCs, combined with the impending end of Windows 10 support in October 2025, may prompt consumers to upgrade their machines to leverage next-generation technologies and ensure ongoing security updates. With AI empowering both legitimate users and hackers, the need for enhanced protection may further incentivize upgrades.
Dell’s stock valuation remains relatively modest, with a forward price-to-earnings ratio of just 12, suggesting that the shares may still be undervalued. However, with the rise of DeepSeek, the investors are now concerned that the sales growth may be slower than anticipated. DELL stock has seen a 38% rise since the beginning of 2024, significantly outperforming the broader S&P500 index, up 26%. Returns for the stock were 52% in 2021, -27% in 2022, 96% in 2023, and 53% in 2024. On the other hand, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
In conclusion, Dell’s attractive valuation, robust server and networking sales, and the impending PC refresh cycle position the company for potential outperformance, making it a compelling AI stock pick for 2025 and beyond. However, investors should exercise caution, as Dell’s business remains vulnerable to macroeconomic uncertainty and shifting industry trends.
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