2024-05-24 11:07:56 ET
Summary
- Dell Technologies may be undervalued due to a disconnect between expectations of future free cash flow growth and consensus revenue and profit growth.
- The company has a strong opportunity to capitalize on the growing AI market and transition from a slow-growth hardware company to a faster-growing AI company.
- Dell's partnerships and focus on enterprise customers position it well for future growth in the AI space.
- Dell stock appears to be undervalued.
Investment Thesis
Dell Technologies ( DELL ) may be undervalued, given a perceived disconnect in the expectations of future free cash flow growth and the company’s consensus revenue and profit growth. Additionally, the markets that Dell does business in are either growing rapidly or are near a bottom in their cycle. Combined, these factors may make Dell a great investment opportunity by way of free cash flow growth and/or the stock gaining a premium P/FCF multiple reserved for a moderate-growth AI company.
Analysts have been revising the growth outlook for Dell upwards in recent months. However, growth in free cash flows may be underestimated. When I analyze the potential free cash flow growth for Dell, I see a potential disconnect between the stock’s current valuation and the opportunity that Dell has in the generative AI market. This could provide an opportunity for investors. I have laid out two paths for Dell to achieve market-beating returns for shareholders potentially. In the first scenario, I laid out a path for Dell to be valued more like an AI stock and less like a traditional PC and server supplier stock. In the second scenario, I estimated potential growth in Dell’s end markets and laid out Dell’s path to growing free cash flows at a high enough rate to deliver great returns.
The Business
Dell offers products and services for enterprises, businesses, and consumers. It operates in two segments, Infrastructure Solutions Group ((ISG)), and Client Solutions Group ((CSG))....
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Dell Technologies: The Generative AI Market Should Support Growth