On the eve of the financial report, Dell surged against the market to hit a new high, with "AI new favorite" highly anticipated

The AI boom has not only created a $1,000 NVIDIA, but also made Dell, a technology company that sells computers as its main business and manufactures server components as its side business, a hot commodity in the market.

In the past 12 months, Dell's market value has more than doubled, making it one of the biggest beneficiaries of this AI boom. Overnight, Dell continued to soar by 7.9%, closing at $179.21, hitting a historical high intraday. This is also the fourth time Dell has hit a historical high in the past few trading days.

Dell will announce its first-quarter performance after the U.S. stock market closes on Thursday (early Friday morning Beijing time). Wall Street is generally expecting the AI darling to deliver an impressive performance, continuing the frenzy-led surge led by NVIDIA.

Wall Street Bullish on Dell's AI Server Business Performance

The huge demand for AI training has put Dell and NVIDIA in the spotlight as shovel sellers.

In terms of annual revenue, Dell is one of the largest technology companies in the world, with businesses involving products such as PCs, data storage arrays, IT services, and software. Due to NVIDIA's GPUs requiring dedicated processors with high-performance memory and other key components, Dell's server business has also benefited from the AI boom, doubling in the past few quarters and gaining favor from Wall Street.

Bank of America predicts that Dell's total revenue for the last quarter will reach $21.1 billion, a 1% year-on-year increase but a 5% decrease from the previous quarter. It may be lower than the median guidance of $21.5 billion, but the bank believes that Dell's Infrastructure Solutions Group (ISG) revenue will grow by 19% year-on-year to reach $9.1 billion, higher than analysts' consensus of $9 billion.

Bank of America has raised its stock price target from $130 to $180 and reiterated a buy rating.

Bank of America analyst Wamsi Mohan believes that in the ISG business, AI server revenue in the first quarter is expected to reach $1.4 billion, with backlog orders increasing to between $4 billion and $5 billion. In the fourth quarter of last year, Dell's AI server revenue was $800 million, with backlog orders doubling to $2.9 billion.

Furthermore, Mohan also emphasized that Dell is benefiting from the wave of data center infrastructure upgrades. With the launch of AI PCs, the company will also benefit from the PC replacement wave. Considering the potential positive factors such as Dell's possible inclusion in the S&P 500 index weighting, Dell is still an undervalued stock.

He wrote:

We believe Dell will have a positive outlook by 2025. Dell remains an undervalued and underweighted stock, with the potential catalyst of artificial intelligence and the possibility of being included in the S&P indexOver the past few quarters, Dell has seen double-digit surges in its stock price almost every time it releases its financial reports. In July 2023, Dell announced that its server revenue for the quarter exceeded analysts' expectations by 16%, leading to a 21% increase in its stock price the next day. In March of this year, Dell reported that the backlog of orders for AI servers in the fourth quarter of last year had nearly doubled. The stock price rose by 32% the following day.

PC Market Rebound and Growth Opportunities Beyond AI

Bank of America also believes that Dell's revenue from client solutions business in the last quarter may decline by 2.8% year-on-year to $11.7 billion, in line with management's guidance of low single-digit business decline under cautious corporate spending.

One major challenge Dell faces is that if its AI server business does not meet analysts' extremely high expectations, its stock price may experience a sharp decline.

For example, Supermicro Computer Inc. (SMIC), which also provides AI servers, has been performing well. Its revenue tripled year-on-year in the first quarter, but due to some discrepancies with Wall Street's forecasts, its stock price plummeted by 14% the day after the financial report was released.

Analysts believe that compared to Supermicro, Dell's business is more diversified, making its foundation more solid. Supermicro's business model carries higher risks and often experiences negative free cash flow.

According to IDC data, there are signs of improvement in the personal computer market, which accounts for over half of Dell's revenue, with industry sales showing growth for the first time in two years in March.

Furthermore, this year, a new type of large-scale on-device AI deployment will also be introduced to the market, creating further potential for performance enhancement.

Bernstein analyst Toni Sacconaghi rates Dell's stock as "Buy," but also expresses concerns about the sustainability of its AI server business.

In a report last week, Sacconaghi wrote:

Nevertheless, we see several other levers (storage, traditional servers, and AI PCs) that could meaningfully add to EPS in FY25.

Goldman Sachs analyst Michael Ng stated in a report last month that if Dell's backlog orders increase by $2 billion in April, the AI server revenue for this fiscal year could reach $5 billion.

He believes that this is achievable, as Nvidia expects high demand for its upcoming new chip, Blackwell. Given the industry-wide supply constraints, Dell's main constraint may be how to obtain a sufficient number of chips.

Ng pointed out that Dell's server customers "seem to have priority in GPU supply." Dell also has a close relationship with Nvidia. Nvidia CEO Jensen Huang attended Dell's annual developer conference last week and invited Dell CEO Michael Dell to the GTC conference in March, where he said on stage:

When it comes to building end-to-end large-scale systems for enterprises, no one does it better than Dell