Do Hedge Funds Like Dell Technologies Inc. (DELL) As an AI Hardware Play?

We recently compiled a list of the 15 Best Hardware Stocks According to Hedge Funds. In this article, we are going to take a look at where Dell Technologies Inc. (NYSE:DELL) stands against the other hardware stocks.

With the first half of 2024 nearly over, artificial intelligence continues to play a dominant role in the stock market. Stocks that either design semiconductors that are used for AI applications, or those that use them to either streamline their internal operations such as coding or offer products to customers have also made significant gains. These show the optimism in Wall Street for accelerated computing technologies, which are collectively called artificial intelligence.

In fact, the impact of AI has been so strong that not only has it upended the status quo of the most valuable firms in terms of market capitalization, but it also allowed some of the top AI companies to post triple digit percentage share price returns over the course of the past twelve months. Some of the top performing AI stocks are up by 213% over the past twelve months and have appreciated by 773% since November 2022. Back then, the stock market was whimpering in the aftermath of rapid interest rate hikes by the Federal Reserve, which had hit technology stocks particularly hard since they benefit from a fast growth and low rate environment.

However, AI’s impact on the stock market has fueled the triple digit percentage gains in some stocks since then. At the same time, it has also meant that major indexes continue to demonstrate robust performance that is fueled by the share price performance of mega cap technology stocks.

In 2024, the market has moved forward from investing in AI companies that can change the world with their hardware or software to evaluating whether these firms are delivering. The first quarter of the 2024 earnings season was the clearest example of this phenomenon, and it saw Wall Street take an unforgiving approach to large and small firms that presented even the slightest hint of being unable to either grow their revenues by targeting AI or control the costs of investing in the new technologies.

Within the AI industry, there are different categories of firms. Most of these, such as OpenAI, operate on the software side. This industry subsegment develops applications such as chat bots and other assistants along with expanding the use of AI to existing software such as image editing tools. AI hardware companies power these applications, and when compared to the software firms, not only do they command stable valuations, but they also see investors take comfort in the fact that the demand for their products is far more stable and predictable when compared to software demand. Recently Goldman Sachs published a bullish report on hardware stocks due to AI, which we covered in 15 Best Hardware Stocks According To Goldman. In this article we are going to approach the same theme from a different angle and there are vast differences between both rankings of hardware stocks.

Our Methodology

To make our list of the top hedge fund hardware stock picks, we ranked personal computing, semiconductor, and computer hardware by the number of hedge funds that had bought the shares in Q1 2024. Out of these, the stocks with the highest number of hedge fund investors were selected. Basically our article listed the best hardware stocks to buy according to the 900+ equity hedge funds tracked by Insider Monkey. Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

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Dell Technologies Inc. (NYSE:DELL)

Number of Hedge Fund Shareholders In Q1 2024: 82

Dell Technologies Inc. (NYSE:DELL) is an iconic computer company that sells laptops and equipment used in data centers and cloud computing platforms. AI was at the heart of its stock story in May 2024 when the shares fell by 18% to set a new record. This drop followed a growth in costs for Dell Technologies Inc. (NYSE:DELL)’s AI server division. The dip came when a Bernstein analyst pointed out during the call that AI margins were effectively zero. However, the average of 16 one year analyst share price targets for Dell Technologies Inc. (NYSE:DELL) is $155.52, which prices in a hefty upside over the current share price of $129.

As March 2024 ended, 82 hedge funds covered by Insider Monkey’s research were Dell Technologies Inc. (NYSE:DELL)’s stakeholders. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital owned the most valuable stake which was worth $891 million.

Looking at Dell Technologies Inc. (NYSE:DELL)’s latest share price trends, a guidance reduction, and the stable nature of its business, a forward P/E ratio of 16 isn’t surprising as it shows slower growth expectations compared to the broader market. As for the non existent AI margins, here’s the full snippet from the earnings call that led to the share price drop:

Toni Sacconaghi: Yes, thank you for the question. If I just look year over year at the ISG business, storage was perfectly flat. AI servers went from zero to 1.7 billion, which sort of suggests that traditional servers were flat. So really the only thing that changed was you added 1.7 billion in AI servers, and operating profit was flat. So does that suggest that operating margins for AI servers were effectively zero? And if that’s not the case, how do you square the circle with what I just outlined? Thank you.

Yvonne McGill: Okay, Toni, I’ll take that one. So when I look at the overall ISG performance from an operating income standpoint, storage, I’ll start with storage, right? So if the operating income was low in storage, you know that Q1 is seasonally our lowest revenue quarter from a storage perspective. When the revenue declines, the business descales, and so we saw that evidenced in the Q1 results. And while OpEx remained unchanged to the points you’re making, the operating rates declined. In traditional servers, we saw strength in large enterprise and large bid mix, so a shift there a bit, which, as you know, that drives lower margin rates. And when I look into Q2 and FY’25, though, I tell you that we expect ISG Opinc rates to improve, as we talked about in the guide, over the year and really deliver against our long-term framework, that 11% to 14%.

So, I think what we saw in the first quarter was multifaceted, but we do continue to expect recovery as the year goes on. And those AI-optimized servers, we’ve talked about being margin rate diluted, but margin dollar accretive. And so you’ll continue to see that evidenced in the results also.

Overall DELL ranks 8th on our list of the best hardware stocks to buy. You can visit 15 Best Hardware Stocks According to Hedge Funds to see the other hardware stocks that are on hedge funds’ radar. While we acknowledge the potential of DELL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DELL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

 

Disclosure: None. This article is originally published at Insider Monkey.

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