TipRanks Smart Value #2: Undervalued and AI-Ready

Shrilekha Pethe on March 18, 2025

Dear Investors,

Welcome to the second edition of our brand new TipRanks Smart Value Newsletter!

In each Newsletter, we aim to highlight an undervalued stock poised for long-term gains. Each week, our analysts will identify an overlooked opportunity – a company with strong fundamentals and a resilient business model, whose stock is trading below its intrinsic value.

Our selections will cover all economic sectors, as true Value can be found everywhere – and we will help you find it. Stocks we recommend will have been carefully analyzed and vetted using TipRanks’ data, ensuring you receive well-researched, high-quality opportunities aimed at delivering substantial, long-term value. We will present you with a comprehensive analysis that outlines our selection process, giving you clear insights into why each stock stands out as a top value opportunity.

With that in mind, let’s dive into this week’s top pick and explore why it could be a valuable addition to your Value portfolio.

This Week’s Top Value Pick: Dell Technologies (DELL)

Dell Technologies (DELL) is a technology company that designs, produces, and markets consumer electronics such as desktop PCs, notebooks, and others. Dell also develops and supplies enterprise IT solutions, including cloud infrastructure, data storage, and cybersecurity. Dell is a global leader in high-performance computing, AI-driven edge solutions, and hybrid cloud technologies. It dominates the market for data center infrastructure and enterprise hardware, holding a leading position in IT modernization, multi-cloud environments, and digital transformation solutions worldwide.

History of Hardware Evolution

The company was founded in 1984 by Michael Dell, who remains its chairman and CEO, as a start-up aiming to sell IBM-compatible computers built from stock components. In 1985, the company produced its first in-house-designed computer and began expanding domestically and internationally. 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 and 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 enterprise IT infrastructure. This process was streamlined by the 2016 acquisition of EMC Corp., which specialized in data storage, management, analysis, and security. The merger created a vertically integrated enterprise IT giant, shifting Dell from a struggling PC maker to a dominant force in cloud infrastructure and enterprise solutions. Today, with a market capitalization of around $67 billion and annual revenues of $95.6 billion, Dell Technologies is ranked #48 on the Fortune 500 list.

Leading Position in PC Transformation

Dell operates through two key segments: Client Solutions Group (CSG) and Infrastructure Solutions Group (ISG). The CSG segment, which accounted for $48.4 billion in revenue in FY25 (50.6% of total revenue), provides desktops, workstations, gaming PCs, displays, and software to commercial and consumer markets.. Meanwhile, the ISG segment generated $43.6 billion in revenue (45.6% of total revenue), offering servers, storage, and networking solutions, cementing Dell’s status as a leading enterprise infrastructure provider.

Despite recent challenges, Dell continues to hold the third-largest share in the global PC market, trailing only Lenovo and HP. The PC market has shown signs of recovery, with global shipments rising 1.3% in 2024, according to Gartner. Small and medium businesses (SMBs) have been the key driver of this rebound, with the demand for AI-powered PCs on the rise as customers seek “future-proof” devices. According to IDC, Dell’s commercial PC market share has grown from 17% in 2014 to 23% in 2024, reflecting sustained demand.

However, consumer demand remains weak, and higher discounting has pressured margins. Notably, Dell’s Total Revenue per Unit (TRU) of $1,235 in Q4 FY25 is nearly twice that of its competitors, emphasizing its premium positioning. Looking ahead, the upcoming Windows 10 end-of-life cycle and a broad AI-driven PC refresh are expected to drive significant upgrades, positioning Dell for future growth.

AI, Cloud and Competitive Edge

While CSG remains cyclical, Dell’s ISG segment has been a consistent growth engine, benefiting from surging demand for AI-ready infrastructure. Over the past decade, Dell’s mainstream server market share has expanded by about 7%, solidifying its leadership. The company’s investments in multi-cloud solutions, particularly through its APEX platform, have positioned it well for the evolving AI and cloud landscape.

The APEX multi-cloud platform has played a key role in this transformation, integrating public, private, and edge computing environments to support AI-driven workloads. Its hardware-as-a-service model has seen customer growth exceed 100% annually, boosting recurring revenues.

Dell’s long-standing partnerships with tech giants like Intel, Microsoft, Broadcom, Meta, Amazon, and AMD further strengthen its competitive edge. The company’s collaboration with Nvidia has been a key factor in meeting the demand for AI-powered computing, including being the first to ship Nvidia NVL-72 GB200-supported AI infrastructure.

As AI adoption accelerates, Dell is well-positioned to gain market share in the AI PC and enterprise AI infrastructure sectors. The company expects AI hardware and services to represent a $295 billion market opportunity by 2027, growing at a 33% CAGR from 2023 to 2027.

Despite potential challenges from U.S.-China trade tensions, Dell has diversified its supply chain to mitigate risks associated with tariffs on Chinese manufacturing. This proactive approach enhances resilience in a volatile global market.

Growth, Margins and AI Momentum

Over the past three years, Dell’s revenue and earnings growth has been impacted by a PC market downturn and cautious consumer spending. However, long-term profitability remains solid, with diluted EPS growing at a 10% CAGR over six years, outpacing revenue expansion.

In FY25, revenue rose 8% to $95.6 billion, while adjusted EPS grew 10% to $8.14. Looking ahead, Dell targets 3-4% annual revenue growth and 8% EPS growth through FY28, driven by a higher mix of ISG and Commercial PC sales alongside cost discipline. Q4 revenue grew 7% year-over-year to $23.9 billion, slightly below analysts’ $24.6 billion estimate, while adjusted EPS of $2.68 (+18%) beat projections of $2.52. Dell has exceeded analyst EPS forecasts in all but one reported quarter. Despite solid earnings, margins remain under pressure. Q4 adjusted gross margin declined 50 basis points (bps) to 24.3%, with AI server production costs – driven by Nvidia’s Blackwell GPUs – remaining high. Dell expects FY26 margins to drop another 100 bps but aims to offset this through cost controls and growth in high-margin ISG storage solutions.

Notably, Dell’s IP storage, which made up nearly 75% of total storage revenue in Q4, remains a key profitability driver. The company also reduced Q4 operating expenses by 6.1%, reflecting its focus on efficiency. Dell’s AI infrastructure business is scaling rapidly, with $4.1 billion in AI server orders at the end of January. The company expects AI system sales to reach $15 billion in FY26, a 50% increase year-over-year. In Q4 alone, AI-related demand totaled $1.7 billion, with $2.1 billion in AI server shipments.

Looking ahead, Dell sees growth from three key trends: data center modernization, AI-powered PC upgrades, and AI infrastructure expansion. The company forecasts FY26 revenue of $103 billion (+8%), with AI-related sales contributing $15 billion. Adjusted EPS is expected to rise 14% to $9.30, slightly above analyst estimates. For Fiscal Q1, Dell expects $23 billion in revenue (+3%) and adjusted EPS of $1.65 (+25%), slightly below analyst forecasts of $1.76 on $23.6 billion in revenue.

Dell has optimized its capital structure, focusing on core leverage over traditional debt-to-equity ratios. Total stockholders’ equity remains negative (-$1.4 billion), reflecting past leveraged acquisitions like EMC and heavy AI investments. However, profitability remains intact, with $3.2 billion in FY25 net income. The company has cut its core leverage ratio from 3.2x in FY20 to 1.2x in FY25, with a long-term target of 1.5x. Major credit agencies rate Dell ‘BBB’ (S&P, Fitch) and ‘Ba3’ (Moody’s), reinforcing confidence in its financial discipline and market leadership.

Shareholder Rewards and Hidden Value

Dell continues to prioritize shareholder returns, distributing $1.1 billion in the fourth quarter through stock repurchases and dividends. The company bought back 6.4 million shares and paid a quarterly dividend of $0.45 per share. Additionally, Dell increased its annual dividend by 18% to $2.10 per share and aims for a 10% or higher annual dividend hike through FY28.

The company has been steadfast in returning capital to its shareholders while maintaining a disciplined approach to financial management. The company currently distributes 28.6% of its earnings to shareholders, ensuring that its dividend payments remain well-covered by earnings. With a dividend yield of 1.88%, Dell offers a significantly higher return than the industry average of 0.73%, making it an attractive income-generating investment.

Since launching its capital return program in FY23, Dell has distributed $10.8 billion to shareholders through dividends and stock buybacks. In February 2025, its Board approved a new $10 billion share repurchase authorization, reinforcing its commitment to capital returns. Over the past six years, Dell has generated $27.2 billion in adjusted free cash flow, returning 106% of it to shareholders – highlighting its focus on shareholder value and disciplined financial management.

Despite these positive developments, Dell’s stock has dropped 16% over the past year. Concerns over supply chain risks, margin pressures, and geopolitical uncertainties have weighed on investor sentiment. However, Dell is proactively addressing these challenges, positioning itself for long-term resilience.

The stock’s decline has also created a significant value opportunity. Dell now trades approximately 45% below the IT sector’s average valuation, with a P/E ratio of 11.9x, suggesting room for further upside. Furthermore, discounted cash flow models indicate that Dell is undervalued by roughly 37%, reinforcing its appeal as a compelling investment opportunity.

Wall Street analysts share this optimism, forecasting an upside of over 44% for the next 12 months. The most bullish projections – coming from well-known Wall Street firms like Wells Fargo, UBS, Evercore ISI, Bank of America Securities, and others – suggest an even more significant gain of more than 50%, reflecting confidence in Dell’s long-term growth strategy.

Investing Takeaway

Category: Smart Value