Dell Technologies (NYSE:DELL) reported its Fiscal Q1 2025 results, which beat market estimates, but this was not enough to prevent a massive sell-off. After hours, the stock dropped 17%, and this decline extended into the May 31 pre-market.
Does DELL stock deserve this reaction?
Dell shares have appreciated by around 120% over the course of 2024 and 279% in the last twelve months, at last check. This has taken the company from a P/E ratio of 12.3x in January 2023 to trading at a multiple of 64x today, repriced based on its AI capabilities.
There’s no doubt that we’re in a bull market driven by the AI revolution, with several tech companies surging triple digits in the past 12 months. However, it seems the bar is being set higher and higher every quarter. A simple slip in aggressive growth metrics for companies trading at very high valuation multiples, as seen with Dell after the release of its results, can cause significant reactions.
From a business fundamentals perspective, Dell is poised for growth, driven by several favorable market trends, including the impending PC refresh cycle due to the aging installed base, the upcoming end of life for Windows 10, and the rising demand for AI-enabled PCs. Additionally, Dell’s new AI-enabled PCs, storage solutions, and server offerings are expected to bolster its growth trajectory. FQ1 2026 EPS estimates, for example, are forecast to increase by 50% year-over-year.
However, the company faces significant challenges, including competitive and cost pressures that could impact margins due to increased enterprise spending. Furthermore, geopolitical issues, such as China’s new guidelines to phase out the use of US microprocessors, could adversely affect sales.
The bottom line
Dell’s fiscal Q1 2025 earnings showed very positive results overall but failed at a crucial point: investors were disappointed with the outlook on margin growth in AI servers.
We’re still in the early days of the AI-server boom, and Dell is doing well to establish its presence in this market. However, the company’s shift from a hardware focus to an AI-centric business has led to a high valuation multiple, creating challenges in accurately assessing how much AI will contribute to Dell’s market value.
Given the early stage and complex pricing dynamics, which enable investors to set their expectations more precisely, Dell’s short- to mid-term performance may experience increased volatility.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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