Dell Should Keep Shining in Nvidia’s Halo

Dell Should Keep Shining in Nvidia’s Halo

Nvidia CEO Jensen Huang and Dell CEO Michael Dell at the Dell Technologies World conference. -Bridget Bennett/Bloomberg News

All these Nvidia chips have to connect to something. This is becoming a very profitable reality for Dell.

The 40-year-old company that began life specializing in made-to-order personal computers has become one of the hottest names in the artificial intelligence craze. Dell’s market value has more than tripled in the past 12 months. It started when Nvidia gave skyrocketing sales forecasts indicating the level of demand for its chips by companies looking to build generative AI services such as ChatGPT. Dell’s stock price has also more than doubled since the start of the year.

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Dell is one of the world’s largest technology companies by annual revenue, selling everything from PCs to data storage arrays to computer services and software. The AI ​​boom particularly benefits the company’s server business because Nvidia’s GPUs, or graphics processing units, require specialized processors with high-performance memory and other key components.

The enthusiastic reception from investors sets the seemingly high bar for Dell ahead of its next earnings report, scheduled for Thursday afternoon. Dell’s server revenue beat Wall Street projections by 16% for the fiscal quarter ended July 2023, giving the stock a 21% rise the next day. In March, Dell announced that its AI server lag nearly doubles during its fourth fiscal quarter. This sent the stock up 32% the next day.

Analysts expect the company’s server revenue to jump 31% year over year to just over $5 billion in the quarter ending in April. This would be the best growth recorded for this segment in more than four years. Super Micro Computer, a much smaller company that focuses on specialized AI servers, saw its revenue triple year-over-year in the March quarter. It’s done a little below Wall Street projectionscausing this hot stock to fall 14% the next day.

Dell should be on firmer footing. Its business is more diversified than that of Super Micro, which also has a higher risk business model this often results in negative free cash flow. The PC market, which accounts for more than half of Dell’s revenue, has shown signs of improvement recently, with sales in the sector increasing in the March quarter for the first time in two years, according to IDC.

A new class of machines with integrated AI is also coming to market this year, creating additional upside potential. Bernstein analyst Toni Sacconaghi rates Dell’s stock as a buy, although he admits concerns about the sustainability of the AI ​​server business.

“That said, we see several other levers (storage, traditional servers and PC AI), which can be significantly accretive to EPS in FY25,” Sacconaghi wrote in a note last week.

Despite the stellar performance of both stocks, Dell trades at a 22% discount to Super Micro as a multiple of forward earnings. But as with Super Micro, Dell’s AI numbers will play a major role in how investors evaluate the latest results. The most closely watched figure will be its AI server backlog, which nearly doubled in the last quarter to $2.9 billion. In a report last month, Goldman Sachs’ Michael Ng said a $2 billion late gain in the April quarter would give Dell visibility into $5 billion in AI server revenue for the current financial year. It actually forecasts AI server revenue to reach $6.8 billion for the year.

It’s doable, especially given the high demand Nvidia said last week which it expects to see for its new class of chips launching later this year. Dell’s biggest constraint could be getting its hands on enough of these chips, given the tight supply seen across the industry.

But Ng noted that Dell server customers “seem to have priority in GPU supply.” Dell also has a close relationship with Nvidia, with CEO Jensen Huang joining Michael Dell on stage at Dell’s annual developer conference last week and singling him out from the audience during the company’s keynote speech. his own big show in March.

“No one is better than Dell at building end-to-end systems at very large scale for the enterprise,” Huang said at the event.

None of Dell’s competitors in the computer equipment field have received such praise. But turning those words into actual sales will be critical, given the premium Dell now offers over more traditional competitors such as Cisco and Hewlett Packard Enterprise. There are big numbers to offer.

Write to Dan Gallagher at dan.gallagher@wsj.com

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