Dell: 85% P/E Expansion With Margin Compression Makes The Stock Risky (NYSE:DELL)

Summary

Dell's stock has surged 433% over five years, despite flat revenue, halved FCF, and a 28% drop in EPS.
Dell's P/E ratio expanded by 50% to 24, and its P/FCF ratio rose from 8 to 28.6, driven by AI exposure.
Strong demand for AI-optimized servers has doubled customer demand, creating a significant backlog securing future sales.
Despite AI server demand, Dell admits AI servers are margin rate dilutive, not margin dollar accretive.
The upcoming earnings call may be a turning point to understand if Dell's prospects justify the current valuation.

Exterior view of Dell Technologies office building, on street with palm and green trees. — Lina Moiseienko

How Dell Surprised The Market

Who would have guessed at the beginning of 2023 that Dell (NYSE:DELL) would have trounced a strong market that delivered a 57% total return?

What is even more striking is that Dell's fundamentals have indeed

Luca Socci

I focus on long term growth and dividend growth investing. I follow both the US and the European stock markets, looking for undervalued stock and/or for high quality dividend growing companies that provide me with cash to reinvest. Over time, I have come to realize that profitability is a much safer driver of gains than low valuation. As a result, I give utmost importance to margins, free cash flow stability and growth, and returns on invested capital. I research stocks within my areas of competence and whenever I find a high-quality company, I usually never get bored in researching it more and more.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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