Motley Fool: Dell: An AI play

Tech companies are spending billions to expand their computing infrastructure to handle artificial intelligence workloads, and Dell Technologies (NYSE: DELL) is positioned to benefit. Dell generates most of its revenue from selling PCs and related accessories, but 46% comes from its infrastructure solutions group, which includes servers.

The stock has fallen roughly by half from its 2024 all-time peak – in part due to concerns over tariffs and the impact that trade conflicts could have on Dell’s supply chain. Dell believes it has a resilient supply chain and that it will be able to navigate these obstacles.

The company’s backlog of orders for AI servers was recently $9 billion, and its infrastructure solutions business’s growth is offsetting the weak sales of its PCs. Dell expects revenue to increase by 8% in 2025, driven by server demand.

Dell forecasts that the addressable market for AI hardware and services will grow at an annualized rate of 33% over the next several years to $295 billion by 2027. Demand should grow for its PC business over the next few years as businesses and consumers upgrade to AI-capable machines. The end of Microsoft’s support for Windows 10 could also be a catalyst for stronger PC sales.

Importantly, Dell stock looks cheap, with a recent forward-looking price-to-earnings (P/E) ratio of 8.5. It’s a dividend payer, too, with a recent yield of 2.5% and a recent dividend hike of 18%.

My dumbest investment

My most regrettable investment move was waiting too long to invest. If I’d started when I was 20 and was earning decent returns, I wouldn’t need to work anymore. But no regrets – I could still be waiting to start investing! – P.P., online

The Fool responds: Your regret is shared by many people. It can feel silly to start socking away money for your retirement or other future financial goals when you’re still in your 20s or even 30s, but that’s the best time to start. To appreciate the value of giving your money time to grow, imagine that you’re 40 years old and planning to retire at 65. You invest $10,000 per year in the stock market. It grows at an average rate of 8% annually (though with stocks, your growth rate is never guaranteed – you might average, say, 6% or 12% over your investing period). Over 25 years, your money grows to nearly $790,000. Pretty good! However, if you’d started at age 30 instead, and given your money 35 years to grow, your nest egg would have been worth around $1.9 million!

We can’t all sock away $10,000 annually. But do aim to invest meaningful sums early and regularly, perhaps via a low-fee S&P 500 index fund.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)

Ask the Fool

Q. How can a $10 stock be more overvalued than a $100 stock? – T.H., Charleston, South Carolina

A. A stock’s price alone doesn’t reflect the company’s value. Consider that $15,000 could be a bargain price for a Rolex watch, while a drugstore watch might be overvalued at $25. To sense whether a stock is overvalued or undervalued, you’ll need to evaluate the share price based on something else, such as the company’s earnings per share, revenue or free cash flow.

Imagine that Mario Inc. and Luigi Co. each have a share price of $72. If Mario has earnings per share (EPS) over the past 12 months of $6, then its price-to-earnings (P/E) ratio – share price divided by EPS – is 12. If Luigi’s EPS is $3, its P/E ratio is higher, at 24. You’d have to pay $12 for each dollar of Mario’s earnings and $24 for each dollar of Luigi’s earnings. This suggests that, all other things being equal, Mario’s stock is more of a bargain.

Before making an investment decision, though, look beyond a stock’s valuation at the company’s health and growth prospects. Check out, among other things, cash and debt levels; the growth rates of revenue, earnings and profit margins; and competitive advantages. A stock with a higher valuation might be the better buy if the company is growing more rapidly and dominating its competition.

Q. What’s a “dead-cat bounce”? – F.E., Keene, New Hampshire

A. It refers to an uptick in a troubled security that has been falling. It’s also called a “sucker’s rally,” because the uptick can lead some investors to invest, thinking the security will keep rising. Some upticks are genuinely the beginning of a recovery, but others are dead-cat bounces, best avoided.