An Increasing percentage of AI revenues, and a return to and an emphasis on on-premise computing will power Dell’s growth for the next 3-5 years.
Industry/Sector/Type - Computer hardware/cyclical/AI Data Center
Biggest catalysts for the stock - Increasing percentage of AI revenues, and a return to and an emphasis on on-premise computing.
I missed out on Dell (DELL) earlier, being a little risk-averse given its cyclical past, but I bought some believing in its long-term future. In spite of the 100% jump in the past year, the stock is still reasonable at 19x earnings growing at 16-20% a year consistently for the next 3 years - double its historical average of 8-10%. Analysts also forecast 10 to 12% revenue growth from a cyclical historical average of 5. There is a good chance that its multiple will expand.
Dell has a huge opportunity to grab increasing on-premise AI computing workloads and is strongly positioned to take advantage of this trend:
This is a large TAM and even with the two decades long proliferation of cloud computing, a survey on AI adoption found that 67% of AI workloads ran outside the cloud – either on premises, on devices, at the edge, or in co-location facilities – and 88% of those surveyed said they are running at least one AI workload on premises.
Why? This trend is being driven by the surging use by organizations of AI agents. AI, particularly agentic AI and inferencing has swung the pendulum back to on-premise infrastructure, in the datacenter and at the edge.
According CEO Michael Dell
They have memory and credentials and access and the ability to take action, and this requires a new architecture for work itself. CIOs are aggressively pivoting to hybrid AI. The risk is not the cloud. The risk is losing control of your data, your cost, your security, your intellectual property, and your speed. In the agent era, lock-in does more than slow innovation. It actually limits what your company can become. Soon, every company will deploy fleets of agents, composing workflows on infrastructure that they control
There are three factors that suggest that the trend towards on-premise computing will continue.
This is Dell’s flywheel and then some, it has a significant presence in selling on-premises AI architecture. More importantly, Dell and Nvidia foresaw this with the “Dell AI Factory with Nvidia” initiative, which provides Dell’s racks, storage, and servers for Nvidia AI systems to companies looking to create an on-premise, Edge AI environment. And it has been very successful in doing so with more than 5,000 customers running Dell AI workloads in their Dell AI factories that include not only the technology but design and innovation, engineering, supply chain, services, support, and financing.
According to the NextPlatform:
These include Pharmaceutical giant Eli Lilly, Samsung, Honeywell, Google’s Gemini, Palantir’s Foundry and Artificial Intelligence Platform (AIP) and Reflection’s open source frontier models and SpaceXAI’s Grok.
Dell claims it is reliable and more cost effective than a cloud environment
Users can test, build, and fine tune agents locally while running the latest open-weight models in the 70 billion to 250 billion parameter range [and] up to a trillion parameters. And you can do it without unpredictable cloud costs, bandwidth costs, or risks of IP leak. This is unmetered intelligence, and you could break even vs. public cloud APIs in as little as three months.
A fairly large share, 52% to 57% of Dell’s revenues, is now coming from the Infrastructure solutions group led by AI servers and infrastructure equipment. More importantly this share will continue to grow. It ended its last quarter with a $43B AI backlog, with management guiding to over 100% AI server revenue growth.
I own Dell and rate it as a Buy.
