Since Dell Technologies Inc.'s (DELL, Financial) initial public offering in 2018, it has gained roughly 530%. However, based on my operational analysis and deep dive into its valuation and future growth estimates, alongside a thorough competitive comparison, I believe the stock is not the wisest of investments at the moment. I believe it may do incredibly well in the short term based on high levels of momentum surrounding artificial intellliegence enthusiasm, but over the long term, I believe the market will reweigh its prospects correctly, and its long-term price returns will not be extraordinary.
Dell's AI initiatives
Dell's AI initiatives are generally focused on generative AI, AI-powered PCs, professional services and collaboration with some of the leaders in the field. Notably, it has introduced the Dell Validated Design for Generative AI with Nvidia (NVDA, Financial), which offers pre-trained models for data extraction without the need for organizations to develop this themselves, and its Latitude series of PCs integrates AI to enhance productivity, collaboration and the user experience. Its full breadth of AI products and services can be broken down as such:
| AI Infrastructure | Dell is continuously developing infrastructure solutions for managing AI workloads. For example, it is advancing computing power, storage and networking to support AI and machine learning. |
| AI Software & Platforms | Dell offers software solutions, such as Dell EMC Ready Solutions for AI, to simplify AI deployments through integration with hardware. |
| AI Collaborations | Dell collaborates with leading AI players like Nvidia, VMware (VMW, Financial) and Pivotal (PVTL, Financial) to utilize advanced GPUs and integrate with leading software. |
| AI Research & Development | Dell is advancing AI capabilities in predictive analytics, machine learning for cybersecurity processes and AI tools for data analysis and management. |
| AI Social & Environmental Projects | Dell is involved in harnessing AI for social, environmental, health care and educational purposes. For example, its AI tools are used to analyze data for climate change research. |
| AI Workforce Development | Crucially, Dell has recognized the importance of developing a workforce that is trained in AI tools and future demands, including collaborations with leading universities to offer AI and machine learning courses. |
My perspective on Dell's AI operations is it offers a significant and comprehensive range of products and services and will undoubtedly be one of the key players in the advancement of AI through numerous industries in the coming years. I believe its preparation in the area is not only prudent, but vital. Further, its heavy investment should reward shareholders over the long term, even if the initial cost is high.
Competition
Dell faces threats from almost all major hardware providers at this time. However, the scale of the competition from each company varies, and I do believe that Dell offers a very promising strategy in light of analyzing the competition:
| Hewlett-Packard (HPQ, Financial) | It utilizes AI to enhance security, performance and user experience. It has a division called HP Labs, which is pioneering in AI research and development. |
| Lenovo (LNVGY, Financial) | It leverages AI across a range of use cases, including smart devices, data centers and tailored business offerings. The company has also incorporated AI into its manufacturing processes, improving efficiency and reducing costs. |
| IBM (IBM, Financial) | It is deeply involved in AI, notably through its Watson platform. It has been deployed for health care diagnostics, financial analysis and weather forecasting. The software particularly challenges Dell in AI analytics and enterprise solutions. |
| Acer (ACEYY, Financial) | While less involved, Acer is incorporating AI to improve battery life and device performance. Its threat to Dell is mainly in the consumer electronics market. |
| Samsung (SSNLF, Financial) | It has a comprehensive AI strategy, including consumer electronics, internet of things, virtual assistants and chip development. It is arguably one of the leading threats to Dell. |
We must remember when investing in companies involved in AI that some will have much higher returns than others, often as a result of how large some companies already are. For example, Salesforce (CRM, Financial) and ServiceNow (NOW, Financial) offer much higher potential rewards than Dell, albeit with more risk, at the time of writing. What is most exciting about this new evolution in technology is that it is bringing many new players to the table, as well as forcing the historically dominant providers to adapt.
Financial implications of AI
My ongoing research into the AI market and how the technology is developing has shown me what will most drastically change for technology companies and most industries is the labor demand. It is rational to think the increased use of AI and automation within businesses will lead to a leaner organizational structure with fewer employees. However, this may not be the case in dominant models and would actually be a slow-growth initiative.
Instead, what is most likely to happen is a restructuring of the job market. For instance, where Dell may have had many humans working in manufacturing, much of this may be automated in the future, lowering production costs and reducing consumer product prices through faster and more efficient processes. However, although human labor jobs in manufacturing may be removed, as an example, new roles should emerge in AI development, AI systems management, creative thinking and design oversight and more.
What I believe will happen is not a phasing out of the job market for humans, but rather an elevation in workloads for the masses out of manual labor and into knowledge work as the general form of human labor. This should increase margins primarily due to manufacturing cost reductions, but it will not increase them so dramatically that salary expenses become phased out.
Value analysis
Overall, I consider Dell to be in a similar situation to IBM (IBM, Financial) as an investment case. For example, Dell is considered significantly overvalued, while IBM is modestly overvalued based on the GF Value chart.
Over the next three years, Dell has a compound annual growth rate of 6.53% expected in earnings per share without nonrecurring items, while IBM anticipates a 4.66% CAGR over the same period. What is quite evident here is that investors are not only getting relatively low growth based on consensus estimates, but also likely not good value either. This goes to show that artificial intelligence is not a panacea. Just because a company is heavily utilizing it does not mean it will drive radical growth. It is much more prudent, in my opinion, to view AI as a growth optimizer, not as a source of growth itself. Therefore, already high growth enterprises will be the ones that benefit the most.
I have broken down my set of six peers into a table, comparing them each on earnings consensus estimates and price-earnings ratios at the time of writing.
| Dell | HP | Lenovo | IBM | Acer | Samsung | |
| 3Y EPS CAGR Consensus | 6.53% | 0.81% | 5.84% | 4.66% | 7.42% (‘2Y') | 45.68% |
| PE Ratio | 20.07 | 8.07 | 16.04 | 19.86 | 28.45 | 39.35 |
Earnings are without non-recurring items
Hardware industry median PE without NRI ratio = 22.84
It is evident from the table that Samsung has very high near-term future growth rates, but I am skeptical of how likely it is it will maintain this over the next decade. Dell has a high price-earnings ratio, but consider that it is valued at a lower multiple to IBM and its consensus earnings estimates over the next three years are stronger. In my opinion, Acer is undoubtedly the weakest of the peers from a value and growth standpoint based on profitability.
Balance sheet risk
Investors who know Dell well will understand that my largest concern with the company at this time is the balance sheet, which has negative equity, with an equity-to-asset ratio of -0.03. Its median over the past 10 years is -0.01, and its maximum is just 0.11. To me, this is very concerning, especially for a company that was founded in 1984.
I believe the company may excel in operations, but have some work to do in financial management. With the balance sheet so poor, I find it extremely unwise that management has repurchased large amounts of stock each year since 2017. As such, I believe it should seriously consider cutting its stock buyback program to refocus its efforts on strengthening the balance sheet and repaying the total debt, which currently stands at $25.99 billion as of the last report.
Further risks that could inhibit progress
Considering that Dell is most likely overvalued at this time, it is also important for potential investors to understand the risks that come with its involvement in AI at the time of this analysis. We should astutely remember, as Catherine Wood (Trades, Portfolio) of Ark Investment Management has mentioned, that with great levels of new innovation come great new companies, effectively disrupting the established balance of power. There is a significant likelihood that Dell will face high-growth competition in the form of new hardware companies, some that larger players will acquire, but some that will remain independent. This is already evident in enterprise offerings with the likes of Salesforce and ServiceNow, which I mentioned above, but also with an array of cybersecurity companies heavily investing in and integrating AI, which could thwart Dell's in-house attempts at hardware and software security.
It is worth remembering that the cybercrime market is going to evolve drastically with new criminal capabilities from advanced technologies, including code and password cracking capabilities from quantum computing. As a result, cybersecurity divisions are also harnessing quantum computing in an attempt to create unbreakable security measures for organizations and their customers. I find it inevitable that Dell will have to collaborate and outsource some of these advanced tasks, which it is notably willing to do, and I commend it for that. However, it still creates some concern over the growth prospects in certain divisions of its AI-led tools.
Conclusion
In summary, Dell is extremely well positioned at this time in the AI market and should benefit from the positive effects of its integration, particularly in business efficiency and pricing over the long term.
However, I believe it is fair to consider the stock as overvalued. As such, I will not be investing, especially when I consider there are many competitors in the space, some of which offer incredibly attractive investment prospects with high growth expected on consensus far beyond what Dell is offering. My rating for the stock is a hold as I believe it could largely perform in line with the broader S&P 500 Index over the next 10 years.
