According to the app of 36Kr, the competition for the artificial intelligence (AI) market has already begun. Major companies such as Alphabet (GOOG.US), Meta (META.US), Amazon (AMZN.US), Microsoft (MSFT.US), and Elon Musk's xAI are investing billions of dollars, while companies around the world are using generative AI, robot process automation, and machine learning to improve efficiency.

Musk believes that artificial intelligence will make a huge leap from generative (using a large pool of data to create content or complete tasks) to artificial general intelligence (AGI) within two years, while others predict it will take longer.

For investors, the key is to find companies that can benefit from the massive spending. This is why Dell Technologies (DELL.US) has recently attracted attention.

Riding the AI wave

Statista predicts that global datacenter revenue will grow by 50% over the next five years, from $416 billion in 2022 to $624 billion in 2029. Only server and storage sales will increase from $176 billion to $308 billion. This is a huge opportunity for Dell.

Dell is a primary supplier for the xAI program, which aims to create the 'world's largest supercomputer' and provide server racks. Dell's main competitor, Super Micro Computer (SMCI.US), is also involved in the construction, but the company's predicament may allow Dell to dominate the market.

It is good news for Dell that Super Micro Computer is in trouble. After Super Micro Computer postponed the submission of its annual 10-K filing, its stock price plummeted, and its reputation was damaged by a bearish report released by Experian Research.

It is reported that Dell is also collaborating with Nvidia to build an artificial intelligence factory, aiming to accelerate the adoption of AI technology. In addition, Dell is expanding its cooperation with partners such as Meta and Microsoft.

These strong partnerships will enable Dell to quickly expand its market share.

Strong performance

Dell's performance in the second quarter was encouraging. Data shows that the company's Q2 revenue increased by 9% year-on-year and 13% quarter-on-quarter.

Both operating profit and free cash flow were strong, at $1.3 billion.

The Infrastructure Solutions Group (ISG), which provides services to data center customers, achieved sales of $11.6 billion, a year-on-year growth of 33%, with server and networking revenue growing by 80%.

This growth is a direct result of increased market demand. Dell's Chief Operating Officer, Jeffrey Clarke, commented, 'In the ISG segment, our AI server orders and shipments once again grew QoQ... Order demand was $3.2 billion, primarily driven by secondary cloud computing service providers. Encouragingly, we continue to see an increase in the number of enterprise customers purchasing AI solutions each quarter.'

He also stated, 'Enterprise remains an important opportunity for us, as many companies are still in the early stages of adopting AI... We delivered $3.1 billion worth of AI servers in Q2... The AI server backlog orders remain healthy at $3.8 billion. Most excitingly, our AI server channel expanded once again in Q2 to include secondary cloud computing service providers and enterprise customers, and has now grown to several times our backlog orders.'

Strong market conditions, industry expertise, and competitors facing challenges are all excellent conditions for Dell.

However, all stocks carry risks, and Dell is no exception. This industry is highly competitive, and the highly cyclical personal computer market is Dell's largest business. Some speculate that operating system and AI feature updates will drive a new upgrade cycle, but currently this is just speculation. Consumers are clearly feeling the pressure of high interest rates, but it is expected that the Federal Reserve will soon cut rates.

Is it worth buying?

In addition to the immense potential of the ISG business, Dell shareholders have other benefits. After a 20% growth this year, Dell's dividend yield reaches 1.5%, and management's goal is to grow at least 10% annually by the 2028 fiscal year. This would provide today's investors with a cost return of at least 2% without considering share price appreciation.

The company is more proactive in share buybacks, repurchasing $700 million in the last quarter and $3.6 billion in the past 12 months, accounting for 4.5% of the current market cap. As shown in the chart below, as share buybacks increase, the number of outstanding shares is rapidly decreasing.

The reason Dell can do this is because it has sufficient free cash flow, with a free cash flow of 24 billion US dollars over the past five years, 1.3 billion US dollars in the last quarter, equivalent to an annual rate of 5.2 billion US dollars.

The stock's PE ratio is higher than its recent average level and competitors such as HP Inc (HPQ.US), as shown in the chart below.

However, Dell's recent performance has been more impressive, and analysts are also optimistic about it. TipRanks data shows that overall, Wall Street analysts give Dell a “strong buy” rating with an average target price of $147.54, 28% higher than the current level.

Since the beginning of this year, Dell has risen by 53%. However, compared to other AI beneficiary stocks, Dell's valuation is still reasonable, being 36% lower than the recent high.