Dell Technologies (DELL -2.17%) shares have soared over the last few years, but despite the sharp increase, the stock's valuation is still very attractive. In fact, the stock still seems undervalued based on the surging demand for Dell's servers, which make up about half its total revenue. Here's why the stock should hit new highs in 2025.
Dell is at half strength but still delivering solid growth
Dell's revenue growth accelerated in the fiscal second quarter ending Aug. 2 to 9% year over year, up from 6% in the previous quarter. Analysts expect Dell's revenue to increase by 10% for the full year, which implies further acceleration in the second half of the current fiscal year.
Record server and networking revenue drove an increase of 38% year over year in Dell's infrastructure solutions segment in fiscal Q2. This is offsetting soft demand in Dell's PC business, where client solutions revenue fell 4% year over year.
The weakness in PC sales will eventually turn around. With Dell already delivering top- and bottom-line growth with half its business still reporting a decline in sales, the stock could hit new highs next year if demand for PCs heats up.
The stock has mostly responded over the last year to the soaring demand for servers optimized for artificial intelligence (AI). For the full year, the company's infrastructure revenue is expected to grow 30% year over year, driven by strong demand for this mission-critical hardware.
Dell is well positioned to win this generational opportunity
Dell puts a lot of emphasis on customer service. It tries to build customer relationships through a direct sales force, in addition to a network of sales partners around the world. It also offers financial services and technical support. This seems to be giving the company an advantage in a hot market for AI solutions right now.
"We are competing in all of the big AI deals and are winning significant deployments at scale," Chief Operating Officer Jeff Clarke said on the company's fiscal Q2 earnings call for the period ended Aug. 2.
Dell says its addressable market in AI hardware and services is $174 billion and growing at a 22% annualized growth rate. Clarke describes AI as a "once-in-a-generation opportunity." The addressable market is about 4 times the size of Dell's infrastructure solutions segment, which provides plenty of upside.
The best reason to buy Dell stock
For a leader in AI servers that is reporting solid top- and bottom-line growth, the stock's forward price-to-earnings ratio of 17 is at the low end of the range for a reasonable estimate of Dell's fair value. Investors shouldn't expect the stock to trade at a high P/E, since Dell is not a fast-growing company, but it's well entrenched in the server and PC market, and it has a history of delivering profitable growth.
Even management seems to believe the stock is undervalued. The company repurchased 5.5 million shares at an average price of $130.03 last quarter. Since the beginning of fiscal 2023, Dell has returned $9 billion to shareholders in dividends and share repurchases. This amounts to virtually all of its free cash flow generated over this time frame, which is extraordinary.
Wall Street analysts expect Dell's earnings to grow 12% per year over the long term. Dell will benefit next year as more AI-enabled PCs hit the market, in addition to continued growth in the server market. All said, Dell shares are an excellent value around $136 and could deliver market-beating returns over the next few years.
