In addition to earnings reports, another notable event that occurs each quarter is the rebalancing of the S&P 500. Companies must meet a number of criteria before they're eligible for inclusion in the index. If companies do not maintain these protocols after joining the index, they risk being replaced.
Dell Technologies(NYSE: DELL) officially rejoined the S&P 500 in September. It's important to note, however, that Dell did not fall out of bounds with the S&P's criteria. Instead, the company was taken private about a decade ago and relisted as a public company in 2018.
Let's dig into Dell's business and explore some of its catalysts related to artificial intelligence (AI). Moreover, I'll benchmark Dell's valuation against some of its peers, which should help determine if the stock is a good buy at the moment.
What catalysts does Dell have?
As far as AI goes, much of the growth narrative revolves around chipsets called graphics processing units (GPUs) or enterprise software. But for Dell, the opportunity lies in IT architecture, such as storage clusters for server racks and networking equipment. And right now, Dell's infrastructure solutions group (ISG) is thriving.
For the second quarter of fiscal 2025 (ended Aug. 2), ISG revenue soared 38% year over year to $11.6 billion. Even better, ISG's operating income of $1.3 billion was up 26% year over year and 74% quarter over quarter.
One big catalyst driving Dell's infrastructure solutions stems from servers and networking equipment. The company signed a high-profile deal with Elon Musk's AI start-up, xAI, back in June -- joining Super Micro Computer in helping xAI design the factory that houses its supercomputer.
While the relationship with xAI is important, I see another catalyst for Dell on the horizon. GPU powerhouse Nvidia is on the brink of launching its next chipware, dubbed Blackwell. I suspect capital expenditure (capex) on Blackwell GPUs will naturally drip into increased spending for IT infrastructure solutions in data centers -- a tailwind for Dell.
On the other side of Dell's business sits its client solutions group (CSG), which sells hardware devices such as laptops and provides professional services. Unlike the infrastructure business, Dell's CSG results leave much to be desired.
During the most recent quarter, CSG revenue was $12.4 billion -- a 4% decline year over year. While CSG's commercial sales to corporate customers were little changed from last year, revenue among consumers dropped by 22%.
A tough macroeconomy plagued by lingering inflation and rising interest rates has caused both consumers and businesses to scale back spending. For this reason, I'm not that surprised to see declining sales and profit in Dell's CSG operation.
However, I'm optimistic that things are going to turn around soon.
Inflation is showing consistent signs of slowing. Moreover, the Federal Reserve finally adjusted its monetary policy with a 50 basis point (0.5%) reduction in its benchmark interest rate. The combination of lower inflation and tapering interest rates should help spark renewed spending by businesses and consumers.
For this reason, I think a refresh cycle is very much in store as companies such as Dell begin rolling out new generations of laptops featuring AI-powered features.
Image source: Getty Images.
Is Dell stock a buy right now?
The chart below illustrates the forward price-to-earnings (P/E) multiple for a number of leading AI infrastructure solutions providers.
DELL PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
With the exception of Arista Networks, the other IT architecture businesses in this cohort trade in a relatively tight range on a forward P/E basis. Of note, Supermicro's valuation cratered after its mixed earnings results, a short report published by Hindenburg Research, and broader weakness in technology stocks in the past several weeks.
With that said, Dell stock has held up relatively well amid some selling activity during August and September. Furthermore, I see the company's re-entry into the S&P 500 as indicative of a sustained long-term growth narrative, not one of a business merely benefiting from the AI boom.
Given the catalysts facing Dell's ISG and CSG businesses, I think now is a savvy time to consider scooping up some shares.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arista Networks. The Motley Fool has a disclosure policy.
