Dell Technologies Inc. (DELL), a technology leader providing the essential infrastructure for organizations to build their digital future, topped analyst expectations for revenue in the first quarter of fiscal 2025. However, the company’s earnings fell short of analyst estimates and reported a double-digit year-over-year decline in operating income.

In the first quarter that ended May 3, 2024, DELL posted net revenue of $22.24 billion, surpassing analysts’ estimate of $21.65 billion. Its Infrastructure Solutions Group (ISG) delivered revenue of $9.2 billion, up 22% year-over-year. Servers and networking revenue grew 42% to a record of $5.5 billion, with demand strength across AI and traditional servers.

“No company is better positioned than Dell to bring AI to the enterprise,” said Jeff Clarke, vice chairman and chief operating officer of Dell. “Servers and networking hit record revenue in Q1, with our AI-optimized server orders increasing sequentially to $2.6 billion, shipments up more than 100% to $1.7 billion, and backlog growing more than 30% to $3.8 billion.”

Dell’s division for PCs and laptops, Client Solutions Group (CSG), reported flat year-over-year growth with revenue of $12 billion. It recently introduced a range of AI-enabled PCs powered by Qualcomm Inc (QCOM) processors. It also announced that a new server, compatible with NVIDIA Corp. (NVDA) chips, will be available in the second half of 2024.

However, the company reported non-GAAP EPS of $1.27, missing the consensus estimate of $1.29.

Further, DELL projects an adjusted EPS of $1.65, plus or minus 10 cents, for the second quarter of 2025. The company expects the adjusted gross margin rate to decrease by about 150 basis points in the fiscal year 2025.

"Given inflationary input costs, the competitive environment and higher mix of AI optimized servers, we do expect our gross margin rate to decline," stated Chief Financial Officer Yvonne McGill on a post-earnings call.

Shares of DELL have surged 34.6% over the past month and 124% over the past six months.

Here’s what could influence DELL’s performance in the upcoming months:

Positive Recent Developments

On May 23, DELL and Ericsson (ERIC) announced a strategic partnership to develop tailored network cloud infrastructure plans and advise communications service providers on their cloud transformation journeys. The companies will commercially introduce Ericsson Cloud RAN software on Dell PowerEdge servers with continuous testing and lifecycle management.

On May 20, the company announced the Dell AI Factory to provide customers access to the industry's broadest AI portfolio, from device to data center to cloud, and an open ecosystem of technology partners to create AI applications that meet their unique needs.

Dell’s new AI PCs with Copilot+ enable users to focus on strategic and creative tasks with AI experiences from Microsoft Corporation (MSFT), powered by Snapdragon® X Elite and Snapdragon X Plus processors. Additionally, Dell AI Factory, featuring advancements in NVIDIA infrastructure and services, accelerates AI adoption and innovation.

Also, in April, DELL expanded its data protection portfolio of appliances, software, and as-a-Service offerings to help customers strengthen cyber resiliency amid rising cyberattacks. The next-gen PowerProtect Data Domain appliances offer enhanced capabilities, ensuring robust data protection.

With Dell APEX Backup Services AI, businesses experience increased productivity and efficiency. Moreover, the native integration of Dell PowerProtect Data Manager with Dell PowerMax drives facilitates rapid, efficient, and secure backup and recovery, empowering organizations with comprehensive data management solutions for the modern digital landscape.

Mixed Financial Performance

DELL’s net revenue increased 6.3% year-over-year to $22.24 billion for the first quarter of fiscal 2025. The Infrastructure Solutions Group (ISG) revenue rose 22% from the prior year’s quarter, and Client Solutions Group (CSG) revenue was flat year-over-year. However, its non-GAAP operating income declined 7.8% from the year-ago value to $1.47 billion.

In addition, the company’s non-GAAP net income and EPS came in at $923 million and $1.27, down 4.2% and 3.1% year-over-year, respectively. Its adjusted free cash flow decreased 9% from the previous year’s period to $623 million.

Favorable Analyst Estimates

Analysts expect DELL’s revenue to increase 1.8% year-over-year to $23.35 billion for the second quarter ending July 2024. The consensus earnings per share estimate of $1.86 for the current year indicates a 7.1% year-over-year rise. Moreover, the company has topped consensus revenue and EPS estimates in three of the trailing four quarters.

For the fiscal year ending January 2025, Street expects Dell’s revenue and EPS to increase 6.9% and 9.9% from the prior year to $94.53 billion and $7.84, respectively. Also, the company’s revenue and EPS for the fiscal year 2026 are expected to grow 7.9% and 16.9% year-over-year to $102.03 billion and $9.16, respectively.

Mixed Profitability

DELL’s trailing-12-month gross profit margin of 23.70% is 52.1% lower than the industry average of 49.52%. Its trailing-12-month levered FCF margin of 7.15% is 28.1% lower than the 9.94% industry average. However, the stock’s trailing-12-month net income margin of 3.63% is 33.3% higher than the industry average of 2.72%.

Further, the stock’s trailing-12-month ROTC and ROTA of 14.06% and 45.28% are significantly higher than the industry averages of 2.58% and 1.51%, respectively.

Mixed Valuation

In terms of forward P/E, DELL is currently trading at 32.30x, 6.7% higher than the industry average of 30.19x. However, the stock’s forward EV/Sales and EV/EBITDA of 1.48x and 12.85x are lower than the industry averages of 2.86x and 14.74x, respectively.

Additionally, the stock’s forward Price/Sales multiple of 1.28 is 55.6% lower than the industry average of 2.87. Its forward Price/Cash Flow of 17.67x is favorably compared to the 23.08x industry average.

POWR Ratings Reflect Uncertainty

DELL’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Hold in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DELL has a C grade for Quality and Valuation, consistent with mixed profitability and valuation. Also, the stock has a C grade for Growth, in sync with its mixed financial performance in the last reported quarter.

Within the Technology - Hardware industry, DELL is ranked #24 out of 37 stocks.

Beyond what I have stated above, we have also given DELL grades for Sentiment, Stability, and Momentum. Get all DELL’s POWR Ratings here.

Bottom Line  

DELL’s revenue beat fiscal 2025 first-quarter analyst expectations but fell short on earnings. Further, the tech giant forecasted lower current-quarter profit and signaled higher costs to build servers that meet heavy AI workloads would impact its annual margin.

Despite near-term profitability challenges, Dell is well-poised to witness significant growth and expansion in the long run, driven by surging demand for its AI-powered servers, continued innovation in its product portfolio, and strategic partnerships and investments.

Given DELL’s mixed financials, decelerating profitability, and mixed valuation, waiting for a better entry point in this stock seems prudent now.

Stocks to Consider Instead of Dell Technologies Inc. (DELL)

Given its near-term uncertain prospects, the odds of DELL outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Technology - Hardware industry instead:

VTech Holdings Limited (VTKLY)

Lantronix, Inc. (LTRX)

AstroNova, Inc. (ALOT)

To explore more A and B-rated tech stocks, click here.

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DELL shares fell $27.17 (-15.99%) in premarket trading Friday. Year-to-date, DELL has gained 123.98%, versus a 10.29% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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