Dell Technologies

Dell reported extraordinary fiscal 2027 second-quarter results, exceeding even the greatly increased expectations established after its first quarter. Revenue grew 58% year over year to $47.0 billion, while non-GAAP earnings per share increased 203% to $7.04.

Why it matters: Despite massively raised expectations after last quarter's results, adjusted earnings were roughly 47% above management’s prior midpoint, and the full-year guidance increase was over 3 times higher than the beat amount in the quarter, implying accelerating growth in the second half. Artificial intelligence demand continues to exceed supply and continues to accelerate even on top of previously high growth rates. The AI customer base continued to expand, as did the backlog, and the pipeline remains multiples of the backlog. We were also pleased to see this demand spreading to multiple product categories. Last quarter, general purpose server demand caught the AI wave, and now growth is expected to be over 100% for the year. This quarter, the storage story started to really play out, with revenue up 26%.

The bottom line: We are raising our fair value estimate for no-moat Dell to $490 per share from $460 previously, now implying an exit forward P/E multiple of 15 times in 2030 versus 16 times previously (on a rolling fair value basis). We would not be surprised if some more upside remains within storage specifically. We view the result as strongly supportive of Dell and of continued AI infrastructure investment, with shares looking close to fairly valued after the current rally. Current results strengthen the case that Dell is evolving from a narrow AI server beneficiary into a broader infrastructure platform. The strongest item in the quarter may have been ISG profitability, which expanded to 15% from 10.5%. Investors will recall this was a key debate several quarters ago. While near-term pricing power may subside slightly, we broadly expect momentum to carry on into next year.

As with all AI-related names, the key debate on valuation is how much of the future AI buildout do investors want to underwrite today. We have our implied exit multiple declining into the midteens by 2030, so we are underwriting decent growth through the next five years, which seems reasonable to us given demand is still exceeding supply and the likely additional spending as foreshadowed by Nvidia's view of medium-term hyperscaler spending. We expect broadening enterprise AI demand and additional storage demand to be key drivers for additional upside and margin strength.

Our fair value estimate is $490 per share. Our valuation implies a fiscal 2027 adjusted price/earnings multiple of 19 times, growing to a forward P/E of 15 times by fiscal 2030 (on a rolling fair value basis).

Our overall thesis on Dell includes consistent sales growth in the AI-optimized server market; general-purpose server sales now tied to the AI buildout via Agentic AI; a return to stronger growth in the storage market, with improving margins driven by Dell IP adoption; and only moderate growth in PCs after fiscal 2027.

In the AI-optimized server market, we forecast Dell to reach a $100 billion run rate by fiscal 2031 (roughly calendar 2030), up from roughly $74 billion in fiscal 2027. This is driven by new architecture launches, continued enterprise adoption, and general strength for the AI buildout. This, combined with strong sales of GP servers to power agents, will help Dell’s server business grow at a compound annual growth rate of 30% over the next five years, the primary growth driver we see for Dell.

The margin profile of this revenue growth is improving. We assume the infrastructure solutions segment (where servers are projected to account for roughly 85% of revenue by 2031) can achieve an operating margin of roughly 14% over time (at the high end of the 11%-14 % guidance), despite the increasing share of AI server sales in the segment. This is driven by margin expansion for storage sales and some operating expense leverage as the business grows. We estimate this implies AI server operating margins go to 9% by 2031 from low single digits previously, driven by operating expense efficiency and a mix shift toward enterprises over time.

We forecast a return to double-digit growth in the storage business (from low-single-digit growth previously). We see only moderate growth of 1% in the client solutions (PCs) segment in most years, with fiscal 2027 as an exception (low-teens growth).

Overall, this leads to a five-year revenue CAGR of 17% for Dell, with gross margins remaining around 19%, driven by AI server mix. In comparison, operating margins are expected to improve to 11% by the end of our forecast period, up from 7.2% in fiscal 2026.

We believe the greatest uncertainty lies in the future of the AI market. Dell’s future growth profile in this business is hard to predict, and if we were ever to enter a new "AI winter," it could materially lower Dell's growth, while upside surprises could lead to positive revisions as well.

We do not believe Dell has an economic moat. While we forecast return on invested capital being strong for a company selling mostly commoditized hardware, we lack confidence that these returns will persist over the next decade. Dell's largest business sells servers and storage, while its other major business sells PCs, primarily to enterprises. In each market, hardware is difficult to differentiate, and price is central to competition. Storage can earn better margins, but we do not view the AI-server boom as moat-enhancing: AI-optimized servers carry lower margins than general-purpose servers, and much of the value accrues to component suppliers.

Dell's PC business is housed in its client solutions group. Dell, HP, and Lenovo together control roughly 60% of the global market, but scale has not made PCs meaningfully differentiated. Memory, processors, and other major components are modular and supplied by third parties. Device manufacturers such as Wistron and Pegatron assemble PCs to specifications provided by Dell and other original equipment manufacturers. Because leading brands use many of the same component and manufacturing partners, their products are broadly comparable.

The PC business is best understood as branded distribution and supply chain coordination rather than manufacturing. Dell manages a global supply chain and directs products into end markets through its brand, salesforce, and distribution network. This valuable role requires little capital. We calculate that Dell averages roughly negative 40-50 days of working capital: it carries limited inventory and often receives payment before paying suppliers. Excluding goodwill, this efficiency reduces the company's invested-capital base by roughly 40% and largely explains how a business with operating margins of only 5%-7% can generate respectable returns.

These capabilities create a more nuanced moat case than the industry's commodity economics suggest. Dell's working-capital efficiency indicates some supplier bargaining power. PC manufacturers typically earn operating margins of only 1%-3%, generate returns on invested capital below 10%, and maintain positive working capital, all inferior to Dell's economics. Dell's brand and distribution network also matter because corporations, which account for more than 80% of PC sales, value vendors with the scale, reliability, and support to handle complex deployments. Its size, component relationships, and supply chain expertise would be difficult for a new entrant to replicate.

Nevertheless, we cannot assign a narrow moat to a low-margin business primarily because it uses capital efficiently. Products remain difficult to distinguish, customers retain substantial negotiating power, and Dell is largely a price taker. These considerations outweigh its scale, brand, and working-capital advantages.

Dell's infrastructure solutions group sells servers and storage arrays, and its role as an OEM creates similar dynamics. In servers, Dell competes with Lenovo and Supermicro, while manufacturers including Inventec, Wistron, and Foxconn assemble broadly similar systems. Competitors generally have access to the same components and supply chain. Value from differentiated hardware usually flows to the component designer—for example, Nvidia in AI servers—rather than to the OEM. Server vendors, therefore, compete mainly on price and service, and no brand appears to possess a durable product advantage.

OEMs still add value by coordinating supply chains, providing deployment and support, and maintaining the brands and salesforces needed to reach fragmented enterprise customers worldwide. Tier 1 cloud providers such as Alphabet, Microsoft, Amazon, and Meta are different; their scale and technical expertise allow them to buy directly from device manufacturers, bypassing OEMs. As enterprises shift more workloads to public clouds, the market served directly by these manufacturers grows, creating structural pressure on traditional server vendors.

AI-optimized servers provide substantial revenue growth but do not improve Dell's competitive position enough to support a moat. Hyperscalers remain major buyers, and device manufacturers capture much of this demand. Dell can win with neocloud, sovereign, and enterprise customers through engineering, deployment, financing, and service, but the competitive forces resemble those in general-purpose servers. AI servers currently have lower margins, while much of the economics flows to GPU and other component suppliers. We therefore see AI mainly as a growth opportunity rather than a source of maintainably higher returns.

Storage offers somewhat more differentiation. Dell sells arrays integrated into enterprise compute, networking, and data-management environments and holds a leading market position. However, substantial value still accrues to NAND, DRAM, and hard-drive suppliers, while hyperscalers can source lower-cost systems directly from device manufacturers. Proprietary software, management tools, and integration can support better margins than servers, but customers typically reconsider vendors during three- to five-year refresh cycles. Their preference for interoperable infrastructure also makes it difficult for Dell to create a closed ecosystem with meaningful switching costs. Dell's gradual share loss over the past decade, as newer competitors gained, illustrates the importance of continuing execution rather than a durable structural advantage.

Overall, Dell's brand, scale, distribution, services, supply chain expertise, and negative working capital create real value and support strong returns on capital. We do not believe these advantages can structurally protect pricing and margins with high enough certainty. Modular products, common suppliers, intense price competition, hyperscaler bargaining power, the public-cloud shift, and periodic competitive refresh cycles lead us to maintain a no-moat rating.

The AI server growth wave is just getting started, and Dell will be a key beneficiary as enterprise sales take off, driving material revenue growth.

AI servers are now linked with GP servers via agentic AI, leading to GP server demand as well. AI will also generate a long tail of higher-margin service revenue, along with other upgrade revenue streams (networking, storage, and memory).

If AI demand is truly durable, the cyclicality of the business will be reduced, and Dell's valuation is quite attractive. Its high growth rates combined with lower cyclicality warrant a higher multiple.

The current growth in the AI server market may not be maintainable, and it is typically lower-margin. With much credit for the AI buildout already baked into Dell's valuation, the margin of safety appears thin.

Supply constraints could create air pockets in earnings growth and put pressure on margins, even if the AI buildout is going strong.

The PC market is also challenged from a structural growth perspective, making it difficult to identify future growth catalysts if AI doesn’t pan out well.