Dell Technologies’ (DELL) earnings are just around the corner, with the company set to report its Q3 FY25 results on November 26. The computer hardware company has gained strong bullish momentum since Q2, driven by better-than-expected earnings and the continued growth of AI in the hardware enterprise sector. Ahead of Q3, I maintain a bullish outlook on Dell, as its guidance may be conservative, supported by strong growth in its Infrastructure Solutions Group (ISG). Further, challenges faced by competitor Super Micro Computer (SMCI) present Dell with an opportunity to capture more market share. Also, management’s projection of lower operating expenses could drive margins and profitability.
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In this article, I will dive deeper into Dell’s achievements in the last quarter, what to expect from Q3, and the company’s ongoing bullish momentum.
A Closer Look at Dell’s Fiscal Q2
Dell’s bullish outlook took a positive turn in late August when the company reported its Q2 earnings. Dell posted EPS of $1.89, surpassing estimates by about 11%. Revenue growth was also a highlight, with the company reporting $25.03 billion in revenue, exceeding estimates by 4%.
One of the standout figures was Dell’s Infrastructure Solutions Group segment, which generated $11.6 billion in revenue, up 38% year-over-year. Additionally, record servers and networking revenue of $7.7 billion (driven by enterprise AI) surged 80% year-over-year.
Arguably the most optimistic aspect was the guidance for the full year. Management slightly raised its Fiscal 2025 revenue forecast to a range of $95.5 billion to $98.5 billion, up from the previous range of $93.5 billion to $97.5 billion. If Dell achieves the mid-point of this guidance, it would imply a 10.3% yearly top line growth for the company. While this represents a significant growth rate for a company like Dell, which has a 5-year revenue CAGR of around 3%, I believe this outlook remains relatively conservative. This cautious approach shields the company from overly ambitious AI growth projections and positions it well to potentially outperform in the near term.
How Dell’s Q3 May be Shaping Up
Looking ahead to the short term, there are several reasons why I believe Dell remains a Buy ahead of Q3. Dell has forecast Q3 sales to be between $24 billion and $25 billion, which aligns with the consensus estimate of $24.6 billion. Additionally, Dell expects its Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG) businesses to grow by 14% at the midpoint, with ISG projected to see growth in the low 30s and CSG expected to grow in the low single digits.
Given these are the numbers to beat, it will also be interesting to see Dell’s progress with margins. Over the past two quarters, margin performance has been a key focus, as gross profit margins have declined by almost 300 basis points, primarily due to a deterioration in product gross margins.
Management expects gross margins to show a slight improvement on a quarterly basis, despite ongoing inflationary pressures that could affect the competitive landscape. For this to occur, a reduction in operating expenses (OPEX) will be critical, as management anticipates a 2% quarterly decline in OPEX. However, it is worth noting that over the last three months, 15 out of 17 analysts have lowered their EPS estimates for Dell, suggesting a more conservative outlook heading into Q3.
Dell’s Valuation Is No Longer Cheap, But Justifiable
Despite remaining bullish on Dell, the stock is clearly not as cheap as it was not so long ago. While Dell trades at an 18.7x P/E ratio—nearly 25% lower than the industry average—it is still twice the company’s five-year average. When we adjust this multiple for growth, considering a forecasted EPS CAGR of 12% over the next three to five years, Dell’s PEG ratio of 1.4x isn’t overly expensive, but it’s also not a bargain.
Arguably, these higher multiples are justified by Dell’s position as a key player in AI infrastructure, especially with the potential for greater penetration into sovereign and larger Cloud Service Providers (CSP) opportunities through Nvidia’s (NVDA) upcoming Blackwell-powered servers. This could further drive enterprise demand, scale Dell’s operations, and support sustained margin expansion.
Dell vs. SMCI: Capitalizing on Super Micro’s Challenges
The strong momentum behind Dell’s investment thesis also benefits from challenges faced by one of its main competitors, Super Micro Computer, which has been grappling with accounting issues.
Super Micro’s troubled history in this area, recently highlighted by a report from Hindenburg Research, may lead its customers and partners to seek more reliable server suppliers. In contrast, Dell is well-positioned to provide direct liquid cooling (DLC) solutions at scale and is expanding its presence in the cloud service provider market, an area where Super Micro has historically been dominant. This gives Dell a significant opportunity to capture more of the growing AI server demand.
As a result, the Dell vs. Super Micro dynamic has become a key topic for traders, with many viewing it as a clear long/short opportunity. Over the past three months, Dell shares have risen by 22%, while Super Micro’s shares have fallen by 54%, highlighting a strong inverse correlation between the two.
Is DELL a Good Buy?
At TipRanks, DELL’s consensus among Wall Street analysts is a Strong Buy, considering that among 18 ratings, 14 of them are bullish and three are neutral. The average DELL price target is $146.43, which implies an 9.31% upside potential.
The Bottom Line
I rate Dell as a Buy ahead of its earnings, as the company is well-positioned for a strong Q3, supported by robust growth in its ISG segment, driven by booming AI server demand, and a potential competitive edge over Super Micro Computer.
While management anticipates modest margin expansion this quarter, I believe that if Dell meets expectations, the stock is likely to rise. Furthermore, valuations remain attractive, particularly for a company that is becoming an increasingly influential player in the AI space.
