Ask the Rational Investor: Dell set for quiet AI turnaround

In the 1990s, I remember going to the Gateway computer store in Belden Village. It had a unique feeling, similar to Starbucks or an Apple store. Do you remember their branding with a cowhide pattern?

Dell Technologies was a rival back in the 1990s but ultimately was one of the big winners due to its focus on commercial PCs and building a distribution model with local IT vendors. This was probably the single most important decision it made, and today results in the company having 25% market share in commercial PCs and 22% market share in monitors.

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If you walk into Best Buy, there are plenty of brands to choose from, and often the prices are ridiculously low. I remember when a PC at Best Buy cost thousands of dollars.

Despite Dell Technologies’ market share, the PC business is a challenging one with low margins, required reinvestment and changing purchaser expectations. This is one reason Dell has focused on commercial, premium consumer and gaming PCs, as the average selling price is about 1.8 times its primary competitors, resulting in a higher profit margin.

As artificial intelligence continues to accelerate, we think businesses will refresh their office PCs to capture productivity gains, and they will likely buy Dell PCs.

Data being generated is one of the fastest trends and is forecasted to grow 25% from 2017 to 2027. Companies looking to harness data need faster, more complicated computers. AI hardware and services total addressable market is expected to grow 25% per year over the next four years as companies increase spending.

Dell’s dominant server and storage businesses, with over 30% market share in both industries, is well positioned to capture an above-average share of needed IT spending.

As Dell’s businesses see accelerating topline growth margins will continue to improve. Michael Dell has been a tremendous steward of shareholder capital and Dell has outlined goals to return 80% of the cash generated by the company to shareholders. One form of capital return will be dividends which the company expects to grow 10%+ through 2028.

The stock market is relatively expensive at 21x compared to historical valuations. Dell Technologies valuation seems reasonable at 12.5x earnings for a company expected to grow earnings 8% per year.

Every investor’s goal and risk tolerance are unique and prior to making any investment decision you should consult with a financial professional.

Sources: Factset, Company Reports

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.

This article originally appeared on The Alliance Review: Dell Technologies set to make turnaround as AI tech spreads