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Artificial intelligence (AI) has emerged not only as an engine powering task simplification and the transformation of business operations, but also as a significant investment opportunity. With AI's persistent evolution and its integration in various sectors, the demand for robust server infrastructure that can support intricate algorithms and applications is rising.
The AI server market is expected to grow at an impressive 25% compound average growth rate from 2024 through 2029, according to industry forecasts. This expected momentum reflects the deeper integration of AI into key sectors like cloud computing, edge computing, and data analytics.
The increased interest in AI server stocks has been a boon for relatively undiscovered names like Super Micro Computer (SMCI), but it’s also drawing renewed attention to old-school tech names like Dell Technologies Inc. (DELL) and Hewlett Packard Enterprise Company (HPE), who both stand to benefit from the rapidly expanding market.
Here's a closer look at these two stocks to determine which is a better buy.
The Case for Dell Technologies Stock
Dell Technologies Inc. (DELL), headquartered in Round Rock, Texas, is one of the original players in the personal computer and server market. Dell offers comprehensive solutions and services globally through the Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG).
Shares of DELL have soared a whopping 215% over the past 52 weeks, substantially outperforming the S&P 500 Index's ($SPX) 32.7% gain. The company pays an annual dividend of $1.48 per share, which yields 1.26%. For fiscal 2025, DELL announced a 20% increase in its annual dividend to $1.78 per share, and targets dividend growth at 10% or higher annually through fiscal 2028.
Priced at 19.21 times forward earnings, Dell currently trades at a discount to its industry peers. Considering its solid growth prospects thanks to AI, entering the stock at this valuation could be rewarding.
Dell's performance exceeded Wall Street's predictions in Q4, led by surging demand for its AI servers. Dell's net revenue fell by 11% year-over-year to $22.3 billion during the quarter, whereas its non-GAAP net income rose22% to $1.16 billion, or $2.20 per share. Analysts were expecting EPS of just $1.73 for the quarter on revenue of $22.13 billion. Orders for the company's AI-optimized servers, including the flagship PowerEdge XE9680, increased 40% sequentially. This growth led to an impressive backlog of $2.9 billion, distinctly outshining forecasts of $1.9 billion. In fiscal Q4 alone, Dell shipped $800 million worth of AI servers, marking over 52% sequential growth.
For fiscal 2025, Dell expects revenue to range between $91 billion and $95 billion, while non-GAAP EPS is estimated to arrive between $7.25 and $7.75.
After Dell’s earnings report, Bernstein's Toni Sacconaghi raised the stock’s price target by 33.3% to $120, and maintained a “Buy” rating. Moreover, Wells Fargo's Aaron Rakers raised their price target by 64.7% to $140, and also reiterated a “Strong” Buy rating, while Evercore ISI Group's Amit Daryanani increased the stock’s price target to $125. Elsewhere, Barclays' Tim Long raised his DELL price target by 77.4% to $94, but kept a “Strong Sell” rating.
DELL has a consensus “Strong Buy” rating overall. Out of the 14 analysts covering DELL, 10 recommend “Strong Buy,” two suggest “Moderate Buy,” one says “Hold,” and one gives it a “Strong Sell” rating. While DELL is currently trading at a premium to the average price target of $111.40, the high price target of $140 implies a 20.6% upside potential.
The Case for Hewlett Packard Enterprise Stock
Spring, Texas-based Hewlett Packard Enterprise Company (HPE) provides solutions that allow customers to capture, analyze, and act upon data seamlessly worldwide. It offers general-purpose servers, storage products, networking solutions, and professional services, catering to commercial and large enterprise clients.
Shares of HPE have returned 26.2.1% over the past 52 weeks, lagging the returns of both DELL and the S&P 500. The company pays an annual dividend of $0.49 per share, yielding 2.72% on its current price.
Priced at 11.84 times forward earnings, Hewlett-Packard Enterprise is currently trading at a 38.3% discount to Dell, on this basis. However, the company’s growth prospects fail to justify even this lower-than-industry valuation.
Specifically, HPE reported mixed fiscal first-quarter results, and provided a subdued outlook for the second quarter. Its $6.8 billion in Q1 net revenue decreased 13.5% year-over-year and 8% sequentially, missing both analysts’ consensus forecast and the company’s own $6.9 billion to $7.3 billion guidance range. The top line declined due to reduced network demands, postponement of GPU orders, and lack of supply support for GPUs. Also, net revenue from servers dipped 23% year-over-year to $3.4 billion.
Despite the setbacks, Hewlett-Packard has sustained momentum in its annualized revenue run rate, which shot up 42% year over year to $1.4 billion. The company also reported a non-GAAP gross margin of 36.2%, a rise of 200 basis points year over year. This progress allowed for Q1 non-GAAP diluted net earnings per share to climb to $0.48. Though this figure exceeded the median point of the company’s guidance range, it was down by 24% year over year, and decreased by 8% sequentially.
Over the past five quarters, the company generated $4 billion in orders. However, due to its deferred revenue model and As-a-Service offerings, only $1 billion of this has been converted to revenue to date.
For fiscal 2024, the company anticipates revenue growth to be flat to 2%. Non-GAAP net EPS is expected to be between $1.82 and $1.92, while free cash flow is expected to be at least $1.9 billion. The company’s recently announced Juniper Networks acquisition, expected to close in late 2024 or early 2025, is expected to be accretive within its first year.
After the earnings report, Stifel Nicolaus dropped their price target on HPE from $20 to $18 and set a “Buy” rating for the company. Additionally, Barclays decreased their target price to $14 and backed an “Equal Weight” rating for the company. Finally, Wells Fargo downgraded the stock from “Overweight” to “Equal Weight,” with a price target cut to $17 from $21.
HPE now has a consensus “Hold” rating on Wall Street. Out of the 14 analysts covering HPE, one recommends “Strong Buy,” one suggests “Moderate Buy,” and 12 say “Hold.” The Street-high target price of $19.00 implies a meager 5% upside potential over the next 12 months.
DELL vs. HPE: Which Stock Is a Better Buy Right Now?
Amid burgeoning demand and groundbreaking technological advancements, the AI server market is poised for significant expansion in the foreseeable future. Tech giants DELL and HPE both stand to benefit from the AI-fueled future.
However, DELL looks better positioned than HPE because of its superior financial performance, optimistic projections, and strong price performance.
While the average price targets for these two stocks suggest they’re both a little overheated after earnings, Dell is more attractively valued at current levels, and offers more growth potential going forward.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
