A major focus of the discussion around Dell Technologies (DELL) is the ongoing AI-driven investment cycle, as tech companies pour substantial resources into new infrastructure. As a leading provider of servers and storage solutions, Dell has benefited significantly from this trend, with the market recognizing its strong position. The surging demand for AI-optimized servers—one of the key reasons for my bullish outlook on Dell stock—has doubled rapidly, resulting in a sizable backlog. In this environment, Dell has achieved strong cash flow growth in its Infrastructure Solutions Group (ISG) segment while also reducing its leverage.
However, the company’s latest results, reported at the end of February, have left the market with mixed feelings. There are concerns about profitability and whether Dell can sustain its growth trajectory. At current prices, I believe these concerns are already priced in, and therefore, I’m a firm bull on DELL stock. In the long term, Dell’s investment thesis still has plenty of upside potential despite trimmed growth expectations.
Spotlighting Dell’s Latest Earnings Figures
At the end of last month, Dell published its Q4 results and guidance for the next fiscal year. While Dell delivered mixed results—beating EPS estimates by 16 cents but missing revenue expectations by $638 million—the market didn’t take it well. Shares dropped by double digits, mainly due to soft Q1 and FY2026 guidance. The Q1 guidance came in at $1.65 per share, while analysts had expected around $1.78, while sales for FY2026 were projected to be between $101 billion and $105 billion, an 8% increase.
However, what really disappointed the market was Dell’s admission that it expects further gross margin compression of about 100 basis points next fiscal year. This is due to a higher sales mix of AI-optimized servers and competition in the consumer segment.
However, I don’t see a reason to become a DELL bear just yet, with plenty of value still available for long-term-oriented investors. Dell’s two core businesses continue to perform well in tighter market conditions, predominantly driven by the ISG segment, as the company looks to benefit from secular growth trends over the next five to ten years.
Evaluating Dell Client Solutions
Regardless of the quality of the business or its growth potential, appropriate valuations are essential for an investment to generate alpha. Since Dell operates two distinct businesses, I prefer to value the stock as two separate pieces and use a discounted cash flow method to determine if the company is fairly valued.
Dell’s largest revenue-generating business is the Client Solutions Group (CSG), which focuses on consumer and small business products. The CSG segment has relatively low operating margins, around 6% in FY2025, compared to the ISG segment’s nearly 13%. According to Dell’s management, margins in the consumer business have been weak due to soft demand, even though Dell is arguably well-positioned for the PC refresh cycle. Still, I think it’s reasonable to expect the CSG segment to deliver low-to-mid single-digit growth in line with guidance for FY2026.
Conversely, I expect the segment to fully mature after the AI infrastructure consolidation phase. I foresee revenue growth remaining flat over the next five years before normalizing at a perpetuity growth rate of 2%.
Regarding profitability, it’s prudent to assume that operating margins will level out, even though workstations and premium consumer PCs have higher average selling prices and better margins. As for working capital, I’m conservatively assuming that the company won’t generate additional cash flow, even though it did so in FY2025 through inventory increases and payables management.
Finally, I believe it’s reasonable to discount Dell’s CSG business’s future cash flows at a rate of 10%, reflecting lower growth and a 0.9 five-year beta. Based on these assumptions, I estimate a fair value of $7.4 billion for Dell’s CSG segment.
Dell’s Infrastructure Solutions Supplement
Although Dell’s ISG unit accounted for 45% of the company’s revenue in FY2025, this segment generated almost double the operating income of the consumer segment, driven by the strong demand for Dell’s servers amid the AI boom.
Based on the company’s guidance, I expect the segment to grow by 18% over the next five years. After that, I expect growth to slow to 15% for the following four years. In the subsequent five years, I estimate a maturing growth rate of 10% until FY2036. As for operating margins, I’ll assume they will conservatively level out at 12% for the next ten years, considering that Dell’s AI server business, as mentioned by management, is margin rate dilutive. This means that, at times, it can be unfavorable based on Dell’s sales mix.
The discount rate for Dell’s ISG business should be lower than that of the CSG business due to higher margins, better scalability, and less volatility in future cash flows. Therefore, a 9.5% discount rate is appropriate for the segment, which is still well above the 10-year treasury yield.
Using the assumptions above, I estimate a fair value of $97.3 billion for Dell’s ISG business. Adding the $7.4 billion from the CSG segment, Dell’s stock should be worth around $104.7 billion, or $149 per share. This suggests an upside of about 55% from the current price, though still below the company’s all-time highs in May 2024.
Is Dell Stock a Good Buy Now?
Despite the recent erratic performance, with mixed results and slightly soft guidance for the next fiscal year, Wall Street remains optimistic about Dell’s stock. Of the 15 analysts covering the stock in the past three months, 12 rate the stock as a Buy, while only three recommend a Hold. The average price target is $137.36 per share, which implies an upside potential of 46% to the current price.
Discounted Cash Flows Suggest DELL is a Bargain Buy
A discounted cash flow (DCF) analysis is often speculative, as no one can say when Dell will deliver on its growth potential or its value. The exercise is as much an art as it is a science. That said, the key point here is that with Dell’s stock having fallen nearly 20% in the first two months of this year and 47% since its all-time highs last year, there’s more room for imprecision in the projections. In other words, if the growth assumptions don’t pan out as expected, the already lower share price protects investors against significant further losses.
For this reason, I rate Dell as a Buy. With resilient performance from its two main businesses underpinning solid performance, DELL stock offers a value play for long-term investors.