Dell Crashed 50%, Why Smart Investors Are Buying the Dip

Dell (NYSE:DELL)’s share price has been on a roller coaster ride in recent months, down from a 52-week high just shy of $180.

With shares now about 50% off their trailing 12-month high point, is now the time to buy Dell?

Key Points

• Despite a 50% stock drop, Dell delivered 8% revenue growth and 39% EPS growth. 
• Dell is poised to benefit from $15B in AI server sales, a key NVIDIA partnership, and a PC refresh cycle.
• Trading at 15x earnings with a 1.9% yield, Dell looks cheap. 

Why Did Dell Stock Fall?

From a quick look at Dell’s recent financials, it would initially seem very strange that the shares have sold off as much as they have.

For the full year of 2024, management reported revenue growth of 8% to $95.6 billion alongside record diluted EPS of $6.38. Earnings growth was especially goo, with per-share earnings rising by 39% compared to 2023.

Despite strong numbers, Dell missed expectations and moderated its guidance that led to market jitters. In Q4, for instance, quarterly sales fell by more than half a billion dollars below the $24.57 billion Wall Street consensus estimate. Upcoming revenue guidance also fell short of what investors and analysts were hoping to see.

Dell falls squarely among the many companies that could be pressured by rising tariffs. Thanks to its global manufacturing and supply chain exposure, Dell Is at serious risk from the Trump administration’s trade policies.

A further concern is Dell’s shrinking cash flow. In Q4, the company was able to generate $474 million of adjusted free cash flow, 53% lower than the $1.01 billion it produced a year earlier. The trend for the year was similarly negative, with full-year adjusted free cash flow falling 45%.

What Does Dell’s Growth Runway Look Like?

Dell has become a major provider of AI servers and expects to sell $15 billion this year alone. With AI models evolving to become ever more complex and requiring more computing power, server sales will likely remain a solid revenue source for Dell for the foreseeable future.

The company also enjoys the benefits of a longstanding partnership with NVIDIA, giving it access and exposure to the world’s largest AI chipmaker.

Dell is also coming at AI from the consumer and business hardware side. As a major maker of PCs and laptops, Dell stands to benefit from an ongoing refresh cycle as individuals and businesses replace outdated computers with new, AI-enabled alternatives. Beyond interest in novel AI tools, this refresh cycle will also be driven by the ending of Windows 10 support later this year.

Cumulatively, these factors could result in rather strong earnings growth for Dell. Over the next five years, earnings per share are expected to increase at an annualized rate of almost 13%.

Management’s guidance for this year forecasts another year of 8% revenue growth and diluted EPS growth of 23%.

Is Dell On Sale?

By most standards, Dell looks quite cheap at the moment, especially for a company that could see so much growth in the years to come. DELL shares trade at 14.8x earnings and 0.7x sales. For reference, this is about the lowest Dell’s P/E has been since early 2023.

Dell’s price-to-cash-flow ratio is somewhat high at 35.6, a metric that’s hardly surprising considering the dip that the company’s cash flows took over the last 12 months.

Dell’s Dividend

Tech stocks aren’t typically known for their dividends, but Dell currently has a surprisingly high yield. Shares of DELL yield 1.9%, well above the average of the S&P 500 index and far higher than most comparable tech companies.

Even better for shareholders is the fact that Dell’s payout ratio is only 27.8%. Between a low current payout ratio and the prospect of continued earnings growth, it’s quite possible that Dell could be a strong dividend growth investment in the years to come.

Management recently added to its push to return cash to shareholders. In late February, Dell announced that it would boost its quarterly dividend by 18% and authorize the repurchasing of up to $10 billion in its own shares.

The new buyback authorization expands on a program of reducing share counts that has been in place since 2022. Although Dell was a net issuer of shares for many years, it has been able to bring its outstanding share count down by about 2-4% in each of the last three years.

If management keeps allocating cash to buybacks, this trend will gradually concentrate shareholder ownership and exert a positive upward pressure on EPS.

Is Dell a Buy Now?

Analysts see value in Dell and the average price forecast is currently $136.28, a price that would see the stock shoot back up by over 47%. Even the lowest price target of $105 would see Dell gain about 15%.

Despite a few bumps along the road, Dell still appears to be in a good position to deliver sustained growth as demand for both AI infrastructure and AI-enabled devices picks up.

With further revenue and earnings growth projected for this year and several tailwinds that are likely to sustain growth well into the future, it appears that the market may have oversold Dell.

Keep in mind that the selloff in Dell shares hasn’t been completely unjustified. Lower-than-expected revenue growth, tariff concerns and a significant reduction of cash flow have all worked against the stock on a fundamental level. With that said, the 50% decline in DELL shares in less than a year while revenue and earnings growth persisted has created a very real argument that the stock could have become undervalued.

Between its runway for growth, an attractive and rising dividend and the strong possibility of undervaluation, Dell appears to be a good buy for the long-term. As demand for AI servers grows and the hardware refresh cycle undergoes another shift, investors who buy at the currently depressed prices are likely to see strong returns over the next few years.