Dell Earnings: Strong AI Server Sales Raise Our Valuation, but the Stock Remains Severely Overvalued

We raise our fair value estimate for no-moat Dell Technologies to $65 per share from $55, following positive fiscal first-quarter results. Dell reported strong artificial intelligence server sales, which we expect to gain momentum over the next few years. Despite the strong growth, AI-server sales continue to contribute only a small percentage to the firm’s top line, and are margin-dilutive. Moreover, growth in Dell’s larger PC business remains weak, and we see this as the firm’s primary driver. We adjust our valuation to recognize rising AI-server demand and an anticipated recovery of traditional server sales. However, we remain skeptical of the market’s rosy outlook on AI server growth and view shares as overvalued. With shares down close to 20% in after-hours trading, we believe the market is reining in unrealistic expectations for Dell’s ability to benefit from AI spending.