Dell’s AI server business roars despite whimpering stock price

Dell Technologies is experiencing a significant strategic shift as an AI infrastructure provider despite recent market challenges. While known primarily for its PC business, Dell has positioned itself as a crucial hardware supplier in the AI ecosystem, particularly as a provider of servers that house Nvidia‘s high-performance chips. The company’s remarkable growth in AI-related backlog—doubling from $4.5 billion to $9 billion since October—signals strong enterprise demand for its AI infrastructure products despite the stock price struggling to regain momentum.

The big picture: Dell has transformed from an AI market darling to a value opportunity as its stock trades at approximately half the price-to-earnings multiple it commanded at its 52-week high last year.

• The company now trades at about 10.5 times its estimated earnings per share over the next four quarters, suggesting market expectations have adjusted to more realistic levels.
• This valuation reset comes as investors have developed a clearer understanding of Dell’s AI margin profile.

Behind the numbers: While Dell’s newer AI server models have raised margin scrutiny, the company characterizes them as “dollar accretive” despite potentially diluting overall margin percentages.

• The extraordinary demand for these servers is evidenced by Dell’s AI backlog doubling to $9 billion since October, driven largely by demand for Nvidia’s Blackwell platform.
• This growth trajectory continues despite the market’s concerns about margin compression.

Key strengths: Beyond its AI server business, Dell offers attractive financial characteristics that enhance its investment profile.

• After increasing its annual dividend by 18% last month, the stock now yields approximately 2.1%.
• The company recently authorized a $10 billion share repurchase program, which management plans to use opportunistically.

Potential headwinds: The AI infrastructure thesis carries several risk factors that could impact Dell’s performance.

• The AI-powered PC category hasn’t gained significant consumer traction as initially anticipated.
• Tariffs remain a significant watch item that could affect Dell’s manufacturing and distribution costs.