While it’s not a member of the prestigious “Magnificent Seven” club, Dell Technologies (NYSE:DELL) just might be the artificial intelligence-adjacent investment you’ve been ignoring for too long. Just be sure to consider the risks involved as Dell still faces an uphill battle in the personal computer (PC) market.
Dell is what some commentators might call a “legacy” business. That’s a polite way of saying Dell is an old company that sells outdated technology.
Yet, even though Dell sells PCs in an era of mobile-device dominance, maybe its offerings aren’t entirely outdated. Indeed, with an AI angle that could bolster its financials, Dell could be the proverbial comeback kid in 2024.
Dell’s results: Investors are not impressed
As we transition from November to December, some experts would claim that this is a seasonally strong time for stocks. Yet, Dell’s shareholders probably didn’t feel very strong on Dec. 1 as the stock dropped 5% — even while the major stock-market indexes were firmly in the green.
The reason for the decline wasn’t difficult to identify. Dell reported the results for the third quarter its fiscal 2024 on Nov. 30, and there certainly were pain points for stock traders to ponder.
First of all, Dell’s revenue fell 10% year over year to $22.3 billion. This total also fell short of Wall Street’s call for $23 billion, which also happened to be the midpoint of Dell’s prior revenue guidance range for the quarter.
It’s challenging to determine why Dell’s revenue declined this much, unless you know where to look and how to read between the lines. Specifically, Dell’s Client Solutions Group, which includes the PC business, sustained a quarterly revenue drop of 11% year over year and 5% quarter over quarter. Analysts expected Dell to generate $12.9 billion in this segment, but the company only took in $12.3 billion.
Dell’s commercial-client revenue in the Client Solutions Group segment was particularly disappointing. In this area, Dell generated $9.8 billion versus the analysts’ consensus estimate of $10.4 billion.
If the critics sought evidence that Dell is a dinosaur/ “legacy” business, this would certainly provide grist to their mill. Frankly, getting investors on board with a business that markets PCs is a tough sell in the 2020s.
At the same time, prospective shareholders may be enticed by Dell’s 2% forward annual dividend yield, which compares favorably to the technology sector’s average dividend yield of around 1%. On the other hand, 2% in annual cash returns won’t be much of a consolation prize if Dell stock gets dragged down by a soft PC market in 2024. Thus, it makes sense that some stock traders decided to dump their Dell shares in early December.
Dell has an AI connection — or two or three
Yet, it’s not all bad news with Dell. Impressively, the company reported quarterly adjusted earnings of $1.88 per share, easily beating Wall Street’s forecast of $1.46 per share and its previous guidance of $1.45 per share.
To a certain extent, Dell’s bottom-line beat can be attributed to keeping its costs under control fairly well. There’s more to the story though, as Dell appears to be an unexpected beneficiary of the generative AI or gen-AI phenomenon.
Jeff Clarke, Dell’s vice chairman and chief operating officer (COO), made sure to connect the dots between gen-AI and the company’s potential for top-line improvement.
“Our servers and networking business was up 9% sequentially, fueled by customer interest in generative AI, and heading into FY25, we expect revenue growth given the tailwinds to our business,” Clarke clarified.
Moreover, Dell’s quarterly press release was rife with references to AI. The company emphasized its Dell Generative AI Solutions portfolio and Precision 7875 Tower, which can help businesses “develop and fine-tune complex GenAI models locally before deploying them at scale.”
In case investors didn’t get the message, Dell highlighted its gen-AI market collaborations with Meta Platforms (NASDAQ:META) and AI-technology specialist Hugging Face. Thus, Dell appears to be going all in on gen-AI tech as a counterbalance to its troubled PC business.
A whole new Dell?
In time, Dell may end up having to reinvent itself as an AI company instead of a PC purveyor. There’s a precedent for this type of metamorphosis, as Nokia (NYSE:NOK) managed to transform itself from a company that sold outdated phones to a 5G specialist with an AI angle.
Yet, if this transformation is to actually happen, Dell’s management has to want to transform and evolve the company. This remains to be seen, but for the time being, investors can at least ponder Dell’s attempt to put gen-AI tech in the foreground and consider buying a few shares.