When you think of artificial intelligence (AI) computing, Dell Technologies (DELL 2.90%) probably isn't the first company you think of. Dell likely reminds you of a laptop or computing station you use at work, not big, powerful AI computing. However, nearly half of Dell's business comes from computing servers, which are a massive beneficiary of the AI computing power arms race.
As a result, some investors are considering Dell a worthy AI investment heading into 2025. But is it worth investing in over other well-established AI companies?
Dell is a tale of two companies
Dell splits its business into two divisions: the client solutions group (CSG), which encompasses laptops and computing stations, and the infrastructure solutions group (ISG), which focuses on computing servers. These two divisions show a stark performance difference, as evidenced in its latest earnings report.
In the third quarter of fiscal year 2025 (ended Nov. 1), ISG saw revenue growth of $11.4 billion, up 34% from a year ago. That's strong growth for a well-established company like Dell and clearly shows how the company is benefiting from AI. However, the growth isn't set to slow down. Management noted in its conference call that its five-quarter pipeline for future AI deals grew 50% from a year ago. AI will be a massive factor in Dell's growth over the next few years, and it remains a key reason to invest in the stock.
CSG, on the other hand, is clearly a drawback.
In Q3, CSG revenue declined 1% year over year to $12.1 billion. Within that division, commercial revenue was up 3% to $10.1 billion while consumer revenue fell 18% to $2 billion. This clearly indicates that Dell is maintaining a solid grip on the business world while losing in the consumer market. This isn't the early 2000s, so there isn't likely to be a boom with businesses or consumers adding more laptops to their lives. As a result, investors should expect fairly mundane growth from this division.
Combined, Dell's revenue rose 10% from a year ago, with earnings per share (EPS) rising 16%. That's respectable growth, but it's fairly average to below average in the AI investing space. However, this could still be a solid investment at the right price tag.
Dell's growth isn't expected to be anything amazing
Dell had a strong 2024, rising more than 50%. That meant it outperformed some big tech stalwarts including Apple and Microsoft.
Additionally, its stock performance was only tied to its business results, as its valuation hardly budged from the beginning of the year to the end.
DELL PE Ratio data by YCharts
At 20.5 times earnings, Dell's stock looks fairly cheap. Compared to the S&P 500, which trades at 25.2 times trailing earnings, Dell's stock trades at a discount to the market.
But that discount is earned. Wall Street analysts project 9% revenue growth for its current fiscal year and 8% growth for next year. That's below-market growth, so for Dell to become a consistent market-beating stock (around 10% per year), it will need to return capital to shareholders.
There are two primary ways to do this: share buybacks and dividends. On the dividend front, Dell pays out a respectable 1.5% dividend. Dell paid out around 43% of its free cash flow as dividends over the past 12 months, so a massive dividend increase isn't likely.
On the share repurchasing front, Dell bought back 3.7 million shares during the third quarter, or about 0.5% of shares outstanding. That's not a huge program, but if it continues at that pace, it will repurchase about 2% of shares outstanding each year.
If you combine Dell's revenue growth, dividend payment, and share repurchases, you end up with a stock that could grow between 10% and 12% each year, which gives it market-beating potential. However, investors should not expect Dell's stock to skyrocket any time soon, as the overall business growth isn't there.
