Smart Servers

In this edition of the Smart Investor newsletter, we examine one of the most prominent companies in the server and infrastructure industry, which is expected to strongly capitalize on the surging demand for AI-supporting hardware.  But first, let us delve into the latest Portfolio news and updates.


Last Week’s Portfolio Movers

❖ Super Micro Computer (SMCI): Shares surged after JP Morgan initiated coverage with a “Buy” rating and a price target of $1,150. The bank’s analysts said that Supermicro is “the leading company in the AI compute market,” and that they expect SMCI to continue dominating the AI server market.

❖ Accenture (ACN): The consulting giant reported FQ2 2024 earnings that outpaced estimates, thanks to surging demand for Generative AI projects. However, the stock dropped as ACN cut its projected revenue growth for 2024, as many of its clients are cutting their non-AI related consulting budgets due to economic uncertainty. Accenture recorded revenues of $1.1 billion from GenAI projects in FH1 and continues to aggressively expand its capabilities in the field through heavy investments in its data and AI practice, as well as via acquisitions.

❖ Stellantis (STLA): Shares rose despite the company’s announcement of another round of layoffs within the industry-wide cost-cutting efforts. The world’s fourth-largest automaker is positioned to benefit from both its legacy autos and its expanding EV production. The Biden Administration has announced the lengthening of its electric vehicle adoption timelines and easing of tailpipe emissions standards, benefitting legacy automakers such as STLA. At the same time, the company has signed multiple EV initiatives with the State of California.

❖ General Dynamics (GD): The Board has authorized a 7.5% dividend increase, starting from the next quarterly dividend payment data on May 10th. The defense company recently won a $145 million contract to modify and update U.S. attack submarines. The deal further strengthens the outlook for record profits this fiscal year, building up on the massive order backlog reported last quarter.


Portfolio Earnings and Dividend Calendar

❖ The Q4 2023 earnings season for Smart Investor Portfolio companies has ended, with no earnings releases scheduled until mid-April.

❖ There are no ex-dividend dates for Portfolio companies in the next week.



New Buy: Dell Technologies (DELL)

Dell Technologies Inc. is an American multinational technology company that designs, produces, and markets consumer electronics such as desktop PCs, notebooks, and others, as well as servers, data storage devices, network switches, etc.


History of Hardware Evolution

The company was founded in 1984 by Michael Dell, who still serves as its CEO today, as a start-up aiming to sell IBM-compatible computers built from stock components. In 1985, the company produced the first computer of its own design and began its domestic and international expansion. In the years that followed, Dell continued its rapid growth and market-share gains, as well as product suite expansion. Due to falling PC sales in the mid-2000s, the company undertook a strategic transformation to diversify beyond PCs.

Between 2013 to 2018 Dell became a privately held company once more, a move that allowed it to work on transformation and invest in R&D without the market pressure for immediate results. During this time, Dell became a significant provider of infrastructure tools for corporate customers. This process was streamlined by the 2015 acquisition of EMC Corporation, which specialized in data storage, management, analysis, and security. The merger achieved scale and vertical integration, sealing Dell’s metamorphosis from a lagging PC maker into a strong player in the enterprise IT infrastructure market.

Today, Dell Technologies Inc. ranks as #34 in a Fortune 500 list of the largest U.S. companies by revenue. It commands a market capitalization of $83 billion and annual revenues of $102 billion. The company’s stock is traded on the Nasdaq and is a component of the S&P 500, Nasdaq Composite, and Nasdaq-100 indexes.


Leading Position in PC Transformation

Dell Technologies operates through two segments, a Client Solutions Group (CSG) and an Infrastructure Solutions Group (ISG). The CSG segment supplies desktops, workstations, gaming computers, displays, and docking stations, as well as third-party software and peripherals, and other consumer-facing products and services. The ISG segment provides servers, storage and networking products, and other enterprise infrastructure solutions.

Dell holds the third-largest market share in the global PC market (after Lenovo and HP), deriving about 55% of its revenues from its CSG segment. However, the CSG segment is cyclical in nature and has been experiencing a downcycle in the past two years. Particularly, its PC sub-segment’s revenue has been hit, as the industry has seen a 15% decline in PC sales in 2023, its worst year in history.

Despite the ongoing weakness in the CSG segment, the outlook has turned much brighter for Dell lately, as rising AI adoption is expected to increase end-market demand. Analysts expect that Dell is well-positioned to gain a large share of the nascent AI PC market, which is slated to grow exponentially in the next several years. In addition, the company invests in staying on top of the most advanced developments in the corporate and personal computer sphere. Thus, it now offers a suite of workstations for AI development and deployment, as well as laptops and mobile workstations built for remote work. According to Bloomberg Intelligence, sales of AI PCs are expected to significantly take off in the coming years, as corporations will have no choice but to optimize for increased workloads.


Key Cloud and AI Player

Meanwhile, the contribution of the ISG segment to Dell’s revenue is quickly growing, thanks to the accelerating corporate demand for advanced infrastructure solutions. While the CSG segment is cyclical in its nature – and has been experiencing a downcycle in the past two years – the ISG has shown steady revenue growth, helping Dell to become a leading computing infrastructure provider.

One of the factors that helped Dell regain its leading position was its investment in the cloud, resulting in the Dell APEX multi-cloud platform. This enables a seamless integration across public and private clouds, as well as edge computing environments. APEX’s structure perfectly positions it for accelerating data storage requirements presented by AI systems. In addition, APEX offers a hardware-as-a-service model, with customer growth of over 100% per year and rising recurring revenues.

Dell’s business model is immensely supported by its extensive long-term global partnerships in all aspects of its business. Dell’s key partner list includes IT and Communications industry leaders such as Intel, Microsoft, Oracle, Broadcom, Meta, Snowflake, T-Mobile, Amazon, AMD, and many more.

Companies’ demand for IT infrastructure modernization to fit the AI era has allowed Dell’s strength in AI and cloud-integrated solutions to come to the forefront. In this realm, Dell’s partnership with Nvidia, which began several years ago, stands out as especially beneficial, as demand for powerful servers to run AI workloads is accelerating.


Dell + Nvidia = AI

The two giants collaborate on multiple initiatives concerning Artificial Intelligence. As a case in point, last summer they announced a collaboration on Project Helix, a platform that would enable companies to build and run their custom AI models. Also last year, the firms announced work on Israel-1, a collaboration to build a large-scale, state-of-the-art AI/ML facility located in Nvidia’s Israeli data center.

At the GTC conference this March, Nvidia and Dell revealed a new partnership to help enterprises adopt AI by addressing the complexities involved with its deployment. The project, called “AI Factory” will offer an end-to-end AI enterprise solution integrating Dell’s compute, storage, client device, software, and service capabilities with Nvidia’s AI infrastructure and software. Dell also said it will offer liquid-cooled systems based on Nvidia’s new Superchips, revealed at the GTC; in addition, its rack servers will support the new Nvidia chips.

In this sphere, Dell competes directly with Super Micro Computer (SMCI), a Smart Portfolio company. With the demand for AI servers and infrastructure already running hot and slated to accelerate quickly in the coming years, there is more than enough space for several champions. The AI server market is expected to reach $150 billion within the next three years.


Beginning to Tap the AI Potential

Dell’s AI server business is still in its early stages, contributing a small percentage of the total revenue. However, its latest earnings report released on February 29th showed surging demand for AI infrastructure. The Infrastructure Solutions segment’s revenue grew by 10% in FQ4 2024 (ended February 2nd, 2024) from the previous quarter. Servers and networking revenue was driven primarily by AI-optimized servers, while storage revenue grew by 16% quarter-on-quarter, with demand strength across the portfolio.

Dell’s adjusted EPS rose by 22% year-on-year in FQ4, by far surpassing analysts’ estimates. That shouldn’t have come as a surprise, as the company beat analysts’ EPS projections in all but one of the quarters for which these numbers have been available.

The company said that it “just started to touch the AI opportunities ahead” and has already seen orders for AI-optimized servers increasing by nearly 40% and backlog nearly doubling. Despite the macroeconomic headwinds, Dell’s management is very optimistic about FY 2025, due to both momentum in AI servers along with nascent improvements in the traditional servers, as well as the forecasted increase in PC refresh rate at corporations. The company raised its FY 2025 revenue and EPS guidance and increased its annual cash dividend by 20%.

Not surprisingly, following the upbeat guidance and a dividend hike, serving as proof of confidence from Dell’s notoriously cautious management, analysts rushed to upgrade their outlook and price targets. Investor sentiment towards Dell’s stock was also supported by the management’s stated plan to return at least 80% of adjusted free cash flow to shareholders through dividends and buybacks. In FY 2024, Dell repurchased shares for the amount of $2.1 billion.

As a result of these positive developments, Dell’s stock has surged 55% year-to-date, bringing its 12-month performance to +205%. After earnings, the stock reached its record high since relisting in 2018 but has given back some gains since. Despite the stellar performance over the past year, Dell’s shares remain reasonably valued, trading ~10% below the IT sector’s valuations. This leaves them with additional upside going forward.



Dell Technologies is turning around, and its current strength seems to be only the beginning. Backed by prudent management and strong cash generation, Dell’s strategic focus on AI placed the company in a great position to acquire a significant share of the AI server and infrastructure market. Meanwhile, the company’s alignment with shareholder interests and its still-reasonable valuation suggest that Dell is an enticing long-term investment opportunity. As such, we believe it can be a valuable addition to the Smart Investor portfolio.


New Sell: Centene (CNC)

Centene Corporation is a diversified healthcare company that provides a full spectrum of managed healthcare products and services, primarily through Medicaid, Medicare, and commercial products. Centene Corp. is the largest Medicaid managed-care organization in the U.S., deriving 65% of its revenue from the program. It is also one of the largest Medicaid health insurers in the nation, serving more than 14 million Medicaid recipients.

The newly released data has shown that out five largest for-profit Medicare Advantage providers, CNC registered the lowest enrollment numbers this year, with total enrollment declining by over 200K since the beginning of 2023. Centene’s Medicaid membership has also declined in 2023. Thus, despite strong growth in CNC’s commercial plans, overall membership was practically unchanged in 2023 from the previous year, while total premiums and adjusted net earnings barely rose. In Q4 2023, adjusted EPS fell by almost 50% year-over-year.

Looking forward, the upcoming Presidential election raises uncertainty regarding continued spending on social security in general, and on Medicare specifically, as well as concerns about the size of federal funding for Medicaid. In addition, the future of the drug price negotiation policy is also highly uncertain.

Given its weak performance last year and quarter and taking into account the lack of visibility on company-specific performance improvement and larger industry uncertainties, the path to further upside becomes unclear. Therefore, we find it prudent to sell the stock.


Portfolio Stocks Under Review

This section will flag stocks that may be let go from the portfolio.

¤ Regeneron (REGN): The FDA has rejected odronextamab, the company’s new treatment for two types of blood cancer, saying that confirmatory clinical trials were insufficient for accelerated approval. While the drug’s revenue potential is smaller than other Regeneron medicines already on the market, the rejection still impacted investor and analyst sentiment. We will closely follow any developments, placing the stock under review with a low urgency.


Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Our exclusive club has lost one member, ULTA, whose shares declined over the past several days as the company’s cautious guidance for this year spooked investors.

The Winners Club now includes SMCI, GE, AVGO, ANET, EME, CDW, STLA, ORCL, AMAT, TSM, MOH, PH, ITT, and GD.

ULTA hasn’t suffered too large a downfall and is now the next in line to enter the Winners’ ranks, holding up to a 29.3% gain since purchase. It is closely followed by CHKP with a 28.9% gain. Will one of them close the gap, or will someone else outrun them to the finish line?



Smart Investor Portfolio



New Portfolio Additions

Ticker Date Added Current Price
DELL Mar 27, 24 $114.65

New Portfolio Deletions

Ticker Date Added Current Price % Change
CNC Jan 10, 24 $77.56 -0.58%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $1025.06 +301.35%
GE Jul 27, 22 $173.55 +210.58%
AVGO Mar 22, 23 $1331.49 +111.04%
ANET Jun 21, 23 $297.83 +96.57%
EME Nov 1, 23 $351.18 +70.17%
CDW Jun 29, 22 $254.12 +60.75%
STLA Sep 6, 23 $28.70 +58.04%
ORCL Dec 21, 22 $126.47 +55.18%
AMAT May 31, 23 $206.67 +55.04%
TSM Aug 23, 23 $138.84 +48.03%
ITT Oct 18, 23 $137.08 +43.52%
MOH May 3, 23 $418.44 +39.70%
PH Oct 11, 23 $549.16 +38.05%
GD Dec 22, 21 $278.35 +36.61%
CI Jul 12, 23 $357.73 +33.14%
CHKP Jul 19, 23 $164.14 +28.92%
APH Aug 9, 23 $113.34 +28.15%
ULTA Nov 15, 23 $514.34 +26.96%
TXT Nov 29, 23 $95.96 +24.77%
JBL Jul 5, 23 $133.61 +22.36%
VRTX Aug 2, 23 $418.46 +20.34%
AIT Dec 6, 23 $195.52 +18.68%
MCK Dec 13, 23 $536.09 +16.00%
CXT Oct 25, 23 $59.95 +15.82%
ACN Aug 16, 23 $336.39 +9.35%
FLT Jan 17, 24 $303.26 +6.79%
WRB Jan 31, 24 $86.54 +6.01%
ELV Mar 6, 24 $517.24 +3.79%
FLEX Feb 21, 24 $28.53 +2.88%
REGN Feb 7, 24 $963.55 +2.74%
AIZ Feb 28, 24 $183.27 +0.84%
J Mar 13, 24 $150.38 +0.80%
COR Mar 20, 24 $242.80 +0.19%
KOF Feb 14, 24 $96.15 -0.92%


What’s Next?

Our next commentary will come out on Wednesday, April 3rd, before the market opens.

Until then – we wish you a world of investment success!

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