Why Dell (DELL) Lags SMCI Despite Record AI Sales

Everyone’s eyeing technology stocks for AI exposure. 

Dell Technologies (DELL) sits at #2 in search volume according to our TrackStar data, with 2,521 searches compared to Super Micro Computer’s  (SMCI) 11,682.

That might not seem like much until you understand what it means.

Beneath those numbers lies a fascinating story of two companies pursuing the same opportunity from very different angles. 

While Dell captured $3.6B in AI server orders during Q3, up 11% from the previous quarter, their overall growth pales in comparison to Super Micro Computer’s blistering 110% pace.

The reason? Legacy businesses.

Here’s what we think about Dell’s transformation.

Dell’s Business

Dell Technologies traces its roots back to Michael Dell’s dorm room PC business in 1984. Today it’s a $94B technology powerhouse.

The company spans the entire enterprise technology stack from laptops to data centers, employing over 170,000 people across 180+ countries.

Dell segments its business into the following areas:

• Client Solutions Group (50% of total revenues) – Personal computers, laptops, and peripherals sold to commercial and consumer customers
• Infrastructure Solutions Group (47% of total revenues) – Servers, storage, and networking solutions for enterprises and cloud providers
• Other Businesses (3% of total revenues) – Includes VMware resale agreements and Secureworks cybersecurity offerings

Q3’s results perfectly illustrate Dell’s current predicament. While AI-optimized servers surged with a $4.5B backlog and traditional servers saw double-digit growth, consumer PC revenue dropped 18%.

Dell is trying to transform itself into an AI powerhouse. Recent launches, like the industry’s first enterprise GB200 NVL72 server rack and 21-inch Orv3 Integrated Rack 7000 supporting up to 480 kilowatts per rack, demonstrate its commitment to innovation.

Yet it faces what Andy Grove called “The Innovator’s Dilemma” – how to pivot without abandoning profitable legacy businesses.

Financials

Source: Stock Analysis

Revenue grew 10% year-over-year to $24.4B in Q3. But dig deeper and you’ll find ISG surging 34% while consumer PC revenue plummeted.

Operating margins expanded slightly to 6.8% from 6.7%, impressive given the pricing pressure in PCs and intense competition in servers.

Cash flow from operations hit $1.6B with $716M in adjusted free cash flow. The balance sheet carries $6.6B in cash against $25.0B in total debt.

Unlike younger competitors focused solely on growth, Dell maintains significant shareholder returns, paying $312M in dividends and repurchasing $413M in stock during Q3.

Valuation

Source: Seeking Alpha

At 17x trailing earnings, Dell trades in line with Cisco (CSCO) but above SMCI’s 15x multiple. Its forward P/E of 21x reflects expectations for continued AI momentum.

However, EV/EBITDA of 12.4x sits well below Cisco’s 17.5x and IBM’s (IBM) 17.5x. This discount likely stems from Dell’s slower growth profile.

Growth

Source: Seeking Alpha

Here’s where things get interesting. Dell’s 3.1% revenue growth might seem respectable until you compare it to SMCI’s staggering 110% surge.

The difference? Super Micro Computer focuses exclusively on high-performance computing and AI infrastructure. They’re not dragged down by legacy PC sales or slower-growing storage business.

Dell’s EPS jumped 57% year-over-year, impressive but again trailing SMCI’s 76%. Forward EPS growth of 7.4% suggests conservative guidance given AI tailwinds.

Profitability

Source: Seeking Alpha

Dell’s superior scale shows in its 22.2% gross margin, dwarfing SMCI’s 14.1%. However, operating margins of 6.5% trail SMCI’s 8.5%, highlighting the burden of supporting diverse business lines.

Return on total capital of 15.9% matches SMCI and beats Cisco’s 11.0%, demonstrating Dell’s efficiency despite its size.

Our Opinion 7/10

Dell faces a classic conundrum. Its AI server business is booming but can’t fully offset challenges in PCs and slower-growing segments.

However, Dell’s scale, engineering prowess, and end-to-end portfolio provide advantages as enterprises adopt AI. The company’s extensive customer relationships and global reach could accelerate adoption once the PC market recovers.

The stock’s modest valuation reflects these mixed dynamics. While it may not match SMCI’s explosive growth, Dell offers a more balanced way to play AI infrastructure with shareholder returns and potential upside from PC recovery.

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