Dell Stock Has Tanked. The Case for Buying the Dip.

Shares of Dell have slumped 28% since we recommended the shares on Oct. 8. (Brandon Bell/Getty Images)

Dell Technologies stock has had an artificial-intelligence problem—but concerns seem overblown. Its earnings report this coming week should give it a chance to show it still has the goods.

Shares of Dell have slumped 28%, to $118, since we recommended the shares on Oct. 8. It was bad timing. The stock had already enjoyed a long rally, having recently peaked at $164, and any wrinkle to the growth story was bound to knock it down.

The wrinkle: higher costs. Morgan Stanley even downgraded the stock on Nov. 16 because of rising memory chip prices. Micron Technology, which makes many of those chips, has seen analysts lift memory chip price estimates over the past few months, according to FactSet. Higher costs would pressure Dell’s gross profit margins, ultimately hitting earnings.

Dell’s gross margin estimates for the third quarter, due to be released Nov. 25, have barely changed in the past few months, so given the rise in memory costs, the company could miss margin forecasts, all else being equal. Then the bottom fell out of the AI trade.

The good news is that Dell has a dynamic and growing business. With at least much of the margin headwind reflected in the stock, it’s time to reup on some shares.

For starters, the damage from rising memory chip prices may not be all that bad. On Wednesday, competitor Lenovo Group reported and memory pricing didn’t appear to hurt its earnings, according to Evercore ISI analyst Amit Daryanani. “Lenovo remains confident margins will not be affected by higher memory prices in the foreseeable future,” he writes.

That’s good news for Dell. The company is expected to report a profit of $2.49 a share on sales of $27.3 billion, and those numbers should be beatable. Dell has topped earnings estimates 18 times over the past 20 quarters, and sales estimates 16 times.

That trend should easily continue given Nvidia’s larger-than-anticipated data-center chip sales, with many of those chips ending up in data centers using Dell’s servers, a business that comprises close to a fifth of sales and is its fastest-growing. Dell could make up any margin headwinds with greater sales.

“We see DELL benefiting as Blackwell [Nvidia’s chip] ramps direct liquid cooling and Air-cooled servers,” writes Mizuho Securities analyst Vijay Rakesh. “We do see near-term headwinds from lower initial AI server margins, but we highlight offsets.”

Investors will also be looking at Dell’s outlook, but that should be less of a surprise given that the company held an analyst day in October, where it said it expects sales to grow 8% annually through 2030. That growth will be led by the Infrastructure Solutions Group, which reflects AI server sales, while its Client Services Group, mostly personal computers, is expected to grow at a 2.5% clip, but could grow faster if AI spurs customers to upgrade.

This, Dell says, could push earnings per share up 15% annually, given its share-repurchase plans.

With the stock now trading at 11 times 12-month forward earnings, down from a peak of over 15 times this year, it looks cheap. If the AI selling stops, there’s no reason it couldn’t return to its previous peak, which would take it to $164—up 39%.

The ride down has been painful, but Dell still presents an opportunity to profit.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com