Dell Technologies and Amazon are capitalizing on the booming artificial intelligence (AI) industry, with both companies poised for significant growth in the data center market. As the demand for AI software continues to surge, the need for hyperscale data centers has skyrocketed. These centers, exceeding 100,000 square feet in size, are being constructed at an unprecedented rate, with researchers predicting the addition of 120 to 130 centers annually.
Tech giants like Elon Musk’s xAI data center and Microsoft are spearheading the construction of massive facilities. For instance, Musk’s data center will span an impressive 750,000 square feet and house 100,000 GPUs, while Microsoft’s data center in Wisconsin will cover two square miles of land.
This surge in data center construction presents a significant opportunity for Dell Technologies. The company provides essential infrastructure, including racks, storage, servers, and software, to support these data centers. Dell estimates that the AI infrastructure market will reach $91 billion by 2025, expanding to $124 billion by 2027. Moreover, Dell’s major competitor in this market, Super Micro Computer, is facing challenges following allegations of financial misdeeds and accounting problems, potentially allowing Dell to capture more business.
Dell’s servers and networking sales have experienced remarkable growth, reaching $7.7 billion last quarter, an 80% year-over-year increase. Overall, Dell’s total sales for the same period amounted to $25 billion, a 9% year-over-year rise, with operating income reaching $1.3 billion, a 15% increase. However, Dell’s PC sales have struggled due to economic slowdowns, remaining relatively unchanged this fiscal year. Nevertheless, Dell anticipates a potential upgrade cycle driven by AI-ready computers.
Data center sales are expected to be the primary driver of Dell’s future earnings. The company’s operating strategy, appealing to dividend and stock buyback investors, commits to returning 80% of free cash flow to shareholders. Recently, Dell raised its dividend by 20% to $0.445 per share quarterly, resulting in a 1.3% yield. Additionally, the company repurchased $1.4 billion in shares during the first two quarters of fiscal 2025, equivalent to 1.6% of its current market capitalization.
Trading at a price-to-earnings ratio of 24, Dell’s stock becomes more attractive when considering its forward basis ratio of just 14. Out of 24 analysts following the stock, 21 rate it as a buy or strong buy, with an average price target of $146, representing a 12% increase from the current price. However, these estimates may be conservative, as they do not yet account for the potential additional business Dell may secure due to Super Micro Computer’s challenges. If Dell surpasses analyst expectations in the coming quarters, the stock could experience rapid growth.
Turning to Amazon, the company is deeply entrenched in the AI race, particularly through its Amazon Web Services (AWS) division. As the largest cloud data provider globally, AWS benefits immensely from the enormous data requirements of AI software. AWS revenue experienced a significant jump in the past two quarters, reaching $27.5 billion in Q3. Notably, the segment generated $10.4 billion in operating income, reflecting a robust 38% margin, compared to 30% in the same quarter last year.
Amazon’s total income for Q3 grew 11% to $159 billion, with total operating income reaching $17.4 billion, up from $11.2 billion in the previous year. The company’s operating cash flow has surpassed previous peaks and continues to show strong growth.
Despite concerns about a potential slowdown in consumer spending impacting product sales, Wall Street’s caution towards Amazon may be unwarranted. The highly profitable AWS segment is well-positioned to compensate for any income gaps. Furthermore, historical valuation metrics indicate that Amazon’s stock is currently undervalued based on operating cash flow and earnings.