Dell Technologies Inc. (NYSE:DELL) reported stellar fiscal second-quarter earnings, beating Wall Street expectations backed by record demand for artificial intelligence servers. Tripling AI server demand, a 70% revenue growth outlook, and booming traditional server sales should have invited bullish calls from Wall Street, yet one firm chose to stick with a Hold rating.
On September 2, TD Cowen analyst Krish Sankar raised the price target on Dell (NYSE: DELL) to $500.00 (from $450.00) while maintaining a Hold rating. TD Cowen chooses to stay on the sidelines despite calling Dell’s results “phenomenal” as the firm remains cautious about how much investors should pay for that growth.
The Phenomenal Quarter
For the fiscal second quarter, revenue for Dell surged 58% year-over-year to a record $46.97 billion, beating expectations of $44.92 billion. Adjusted earnings per share of $7.04 topped the expected $4.92 figure.
Soaring demand for its AI servers helped the company boost its annual revenue forecast by $25 billion and also raise its profit outlook for the second time this year. FY27 revenue outlook was raised to $192 billion from $167 billion, an estimated 69% year-over-year growth.
AI servers did most of the heavy lifting for Dell’s growth. The company reported $16.4 billion in AI-optimized server revenue, with AI server outlook now sitting at $74 billion for the year, up 200% year over year.
According to TD Cowen, traditional server upgrades and early demand for CPUs could offer another source of growth to Dell. Meanwhile storage expansion and PC share gains may further support its outlook.
Component Cost Inflation Isn’t Impacting Prices Yet
While the striking numbers may look impressive, TD Cowen has also flagged a risk for Dell: component cost inflation. While this factor isn’t impacting prices yet owing to Dell’s operating and cost efficiencies, Dell may eventually have to pass these on or accept weaker margins.
Besides this risk, TD Cowen has sharply raised its earnings estimates for Dell, but also lowered the valuation multiple it applies to those earnings. While it expects Dell to earn more, it doesn’t believe that investors should be paying a higher premium for this growth.
“We value Dell on a SOTP method assigning a 18x multiple (was 25x) to the ISG group and 10x to CSG. The blended 16x multiple (was 21x) applied to our FY28 EPS estimate of $31.00 (was $21.50) yields our $500 price target (was $450).”
Conclusion
Overall, Dell’s strong quarter makes it AI growth story difficult to question. Hedge fund interest has also been increasing in the stock. At the end of the second quarter, 77 hedge funds had positions in the stock, up from 72 in the previous quarter.
Institutional investors such as D.E Shaw boosted their position in the stock by more than 12,000% to 973,711 shares, an example of improving institutional interest in Dell.
TD Cowen’s rating therefore reflects a distinction between operational execution and valuation. Dell’s quarter was indeed phenomenal, but it needs to deliver extraordinary earnings growth to create meaningful upside from current levels.
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