Buy or Fear Dell Stock?

Dell Technologies (NYSE:DELL) posted a better than expected set of Q2 2025 earnings last week, as demand for artificial intelligence (AI) servers surged. Revenues came in at $29.8 billion, up 19% year over year and ahead of expectations, while adjusted earnings per share came in at $2.32, a 19% increase compared to last year. However, the markets looked past the strong Q2 showing, as the company’s outlook for Q3 missed expectations, with margins also remaining under some pressure.  Dell stock declined by close to 9% in Friday’s trading. This raises the question – is this a good opportunity to buy the stock?

AI Is Driving Growth

Dell’s server business remained the company’s star performer over the last quarter, as big tech companies and large enterprises look to deploy high-powered servers to run artificial intelligence applications. Dell shipped $8.2 billion worth of AI servers during the quarter. The Infrastructure Solutions Group, where revenue jumped 44% driven by a 69% surge in Servers and Networking sales, was the key driver of growth. The Client Solutions Group, by contrast, was largely flat, posting just about 1% growth. Some key customers for Dell’s servers include Elon Musk-backed xAI and CoreWeave. Dell has an edge over rivals such as Super Micro, given its bundled approach which combines hardware, services, and financing, and this helps the company finalize large-scale AI infrastructure deals quickly.

Dell also recently launched its 17th-generation Power Edge servers, which offer improved performance, security, and energy efficiency compared to previous generations, making them attractive to enterprise customers for upgrades. Besides this, the end of support for Windows 10 is set for mid-October and this is expected to lift PC demand as organizations and consumers upgrade to Windows 11 or new PCs, which could benefit Dell’s Client Solutions Group. Separately, Is this Semiconductor player the most overlooked AI play?

Some Concerns

Investors have been concerned about the profitability of the server business. The operating margin in Dell’s infrastructure unit, which includes server and networking sales, stood at 8.8% for the quarter, coming in well below estimates. While Dell has attributed part of the margin concerns to one-time expenses over the quarter as it worked to provide servers with the latest Nvidia chips, while adjusting to a changing regulatory environment, this is concerning. The business uses pricey in-demand GPU chips from companies including Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD).

Besides this, the server market is also very competitive and somewhat commoditized, and this could put a lid on profit growth even if sales continue to grow.  Dell’s third-quarter outlook also disappointed investors. The company guided for adjusted EPS of $2.45 at the midpoint, which was slightly below Street estimates, while revenue expectations of $26.5 to $27.5 billion were roughly in line with consensus. That said, Dell lifted its full-year revenue forecast to $105 to $109 billion and raised its AI server shipment target to $20 billion, up from $15 billion previously.

There are also concerns whether Dell’s AI fueled server surge can hold up. Dell booked $5.6 billion of AI server orders over the quarter, down from $12.1 billion in the previous period. It shipped $8.2 billion worth of the servers. This means that AI server backlog fell to $11.7 billion, down from $14.4 billion in Q1. This could potentially point to some slowdown in revenue in the future quarters.

Is Dell Stock A Buy? 

Dell stock trades at just about 13x forward earnings. This might appear to be a fair multiple, with Dell on track to grow sales by 13% this year and by about 7% next year, per consensus estimates. Dell’s financial position is very strong. Debt stands at about $29 billion, while its current market capitalization is $85 billion. This implies a Debt-to-Equity Ratio of 34.2%. Cash (including cash equivalents) makes up $7.7 billion of $87 billion in total Assets. This yields a Cash-to-Assets Ratio of 8.9%.

However, downturn resilience is also slightly worse than the broader market. Over the 2022 inflation shock, Dell stock fell 44.4% from a high of $60.77 on 9 February 2022 to $33.77 on 12 October 2022 vs. a peak-to-trough decline of 25.4% for the S&P 500. While the recent pullback may offer an entry point, given the growth prospects in AI infrastructure and enterprise IT space, investors must be mindful of the competitive pressures and cyclical profile that can increase downside risk in weaker markets.

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