Investor advantage: Dell is poised for solid long-term growth

“Know what you have and know why you have it.” – Peter Lynch

As of this writing, the Dow Jones Industrial Average is at an all-time high of just over 42,000. For comparison, when I started in the investing industry in 1987, the Dow was just 2,700.

This is fantastic wealth creation – for those who haven’t sold.

This, my friends, is why I repeatedly recommend buying and holding quality stocks for the long term.

In any case, with all the major indices essentially at all-time highs, I was looking – as I always do – for a solid growth company with an attractive valuation and bright long-term prospects.

Dell Technologies (ticker symbol DELL) fits this bill quite well. This is a cult brand whose computers have been ubiquitous since the early 1990s. It is also a major beneficiary of the artificial intelligence boom, while remaining almost 30% below record levels.

Dell was founded in 1984 by Michael Dell, who started the company in his dorm room at the University of Texas. Demand for Dell personal computers skyrocketed in the mid-1990s when Dell began selling computers on the Internet and offering online customer service. By 1999, Dell had become the largest seller of personal computers in the United States, overtaking Compaq Computer. The company’s stock was the darling of the 1990s tech boom, rising an astonishing 120,000% from its low in February 1990 to its peak in April 2000.

However, already in 2013, competition in the personal computer market as consumers switched to smartphones began to eat into the company’s profits, and Michael Dell decided to return the company to private hands.

Fast forward to 2018, and Dell Technologies (with Michael Dell still as CEO) expanded its product offerings and began trading as a public stock again. The company has expanded beyond personal computers into the much larger data storage, security and networking markets. Since going public in 2018, Dell shares are up 154%, a solid 18% year-over-year gain, outperforming both the S&P 500 and Dow Jones Industrial Average.

The investment thesis for Dell technology is based on the development of artificial intelligence and, in the case of Dell in particular, the demand for more sophisticated servers and computers.

I believe the market for AI servers that can do everything from cybersecurity to data protection will be huge. By some estimates, AI servers could generate $430 billion in sales by 2033, up from $31 billion last year.

One of Dell’s main advantages is its cooperation with “hyperscalers”. Hyperscalers are data centers that require at least one million square feet of space. As the development of artificial intelligence intensifies, these huge centers used for data storage and artificial intelligence applications will see enormous growth. For example, the number of hyperscaler locations increased from 259 in 2015 to 992 in 2023, a fourfold increase – and this is in the early stages of artificial intelligence development. Since Dell is a major player in the server market, it is strategically positioned to take advantage of this trend.

Although Dell is the leader in server market share and has about 20% of the total market, there is enough room for growth here. As I write this, Dell’s main competitor, Super Micro, is down 12% on news of a Department of Justice investigation into the company’s alleged accounting irregularities, and it recently delayed filing a $10,000 lawsuit. I bet Dell will take significant market share from Super Micro.

Another potential catalyst for Dell is its existing business: personal computers. Since Dell is the third largest PC vendor in the world with a market share of 16%, it will benefit from this trend. Dell executives believe the AI-enabled desktop market could reach $174 billion by 2027, up from the current market of $80 billion.

Dell’s share price is currently $113, down from $180 in May after it issued disappointing guidance. However, in my experience, temporary earnings disappointments usually provide an attractive starting point for purchasing a great company at a sale.

In fact, by comparison, current AI “poster boy” Nivida trades for around 35 times forward earnings. Dell Technologies sells at 15 forward earnings. I know they are very different companies, but both will be essential in the development of artificial intelligence.

You don’t have to be an AI supercomputer to know that Dell is a good buy here.

Jim Burns is a chartered financial analyst and president of JW Burns & Co. The opinions expressed here are his own and do not necessarily reflect his opinions syracuse.com and Poststandard. Readers should conduct research before making an investment decision. Contact him at [email protected].