It's always an interesting time when a notable shareholder or executive at a major company buys or sells a lot of stock.
Unfortunately for Dell Technologies(NYSE: DELL) shareholders, founder, chairman, and CEO Michael Dell disclosed a massive share sale on Monday.
Dell had been thought of as a recent AI winner, and a relatively low-valued one at that. The stock, while up 57% on the year, is still more than 33% below its all-time highs set back in May.
So, it's a strange time for the founder to be selling a lot of stock. But do investors really have reason to worry?
Dell sells 10 million shares
On Monday, Dell disclosed that founder and CEO Michael Dell sold 10 million shares at an average price of $122.40 during September, good for a whopping $1.22 billion.
Furthermore, this recent sale was only part of Dell's overall unloading of Dell shares this year. Through June, Michael Dell had already sold some $2.12 billion of stock at prices in the $130s. Overall, he's sold a whopping 23 million or so shares in 2024.
So, this recent $1.22 billion sale just seems like a continuation, albeit at somewhat lower prices. Curiously, Dell didn't sell any stock when shares rocketed to a high of $179 in May, but that may have been due to trading rules around the time of the company's May earnings release.
Is Dell overvalued? It doesn't look like it
Dell's shares are much higher than they have been over the past few years, thanks to enthusiasm over the company's prospects in artificial intelligence servers. Still, it's not expensive compared with other stocks, especially those perceived as AI winners. Shares trade at just 20.8 times trailing earnings but just 14.4 times earnings expectations for Dell's fiscal 2025, which ends at the end of January.
14 times earnings doesn't seem like a high price, especially for a company geared toward the AI revolution. And based on fiscal 2026 estimates, which ends January of 2026, Dell trades at only 12 times 2026 expectations today.
Wall Street doesn't seem to think shares are expensive, either. 17 of the 21 sell side analysts covering Dell rate it at least a "Buy," with price targets ranging from $106 to $220 and an average price target of $146.
Does Michael Dell see something analysts don't?
The worst case for shareholders would be if Michael Dell sees risks to those growth expectations analysts don't see. Those risks could take two dimensions: One, the AI infrastructure buildout might not be as big as some think. Or two, competition may be creeping into Dell's AI server business.
The "AI buildout coming to an end" thesis doesn't appear to hold water. After all, in a late June interview on CNBC, Dell said he thought the AI buildout was "at the beginning." So, it would be very strange if he were seeing a slowdown while saying that. Other major tech executives also remain quite bullish on AI infrastructure.
For its part, Dell saw very rapid 23% sequential growth for its AI servers in the July quarter to $3.2 billion. That annualizes to a growth rate of 129%. While Dell noted its AI server backlog was "only" $3.8 billion, management also noted its pipeline was "several multiples" of the backlog.
Image source: Getty Images.
Now, there have been concerns over gross margins in the AI server space, which has become very competitive. That could limit the ultimate benefit of all this revenue growth. To be sure, Dell's server gross and operating margins fell year over year, with the infrastructure segment's operating margins falling from 12.4% to 11% last quarter. Still, that was an improvement from the prior quarter, when infrastructure operating margins were only 8%.
Still, AI server margins are worth monitoring going forward.
Tax concerns may be another reason
For shareholders, the best possible reason for the sales would be if Michael Dell were selling for personal reasons or tax reasons. The tax issue looms, as capital gains tax rates may go up under a new administration next year. Furthermore, some of the tax cuts from the 2017 Tax Cuts and Jobs Act are set to expire in 2025. The uncertainty around corporate tax rates, which could affect Dell's bottom line, as well as potential capital gains tax increases, may have spurred Michael Dell's recent sales.
We have recently seen other long-term shareholders and founders cash in big gains this year. Warren Buffett himself has sold massive portions of his largest stock holdings Apple and Bank of America, citing potential tax increases as a reason. Meanwhile, his insurance deputy, Berkshire Hathaway Vice Chairman Ajit Jain just unloaded $139 million of Berkshire stock -- over half his stake in the company.
Why I wouldn't worry
When asked about his share sales in June, Dell replied he sells shares occasionally and continues to be an "enthusiastic" long-term shareholder.
And this is true. As of May, Michael Dell owned a whopping 330 million shares of Dell stock, divvied up between Class A and Class C shares. Dell's Class A shares aren't traded, but carry greater voting power than publicly traded C shares.
In that light, Dell's sale of some 23 million or so shares this year isn't that much, only amounting to roughly 7% of his entire holdings.
Given the stock's run this year and potential higher taxes on corporations or capital gains next year, it's not worrisome to see the company's founder trimming his stake by a single-digit amount -- even if that amounts to billions of dollars.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
