On Friday, Citi maintained a Buy rating on Dell Technologies Inc (NYSE:DELL) and raised its price target to $125 from the previous $92. This adjustment follows Dell's announcement of strong quarterly results and a better-than-expected earnings guide for the fiscal year 2025, along with a significant artificial intelligence (AI) backlog.
The tech company's AI backlog was reported to be approximately $2.9 billion at the end of the quarter, marking an 80% quarter-over-quarter increase and surpassing the anticipated $1.7 to $2 billion. Dell's management highlighted the company's extensive AI infrastructure and device offerings, in addition to services and support. These offerings, combined with Dell's relationships with tier-2 cloud providers, government organizations, and enterprises, are expected to contribute to the company's growth in the overall AI market.
According to Citi's analysis, the addressable market for AI is projected to reach $152 billion by 2027, which is an increase of roughly $28 billion compared to previous estimates of $124 billion. This expansion in the total addressable market (TAM) could potentially add an incremental $23 to $30 billion in AI-enabled revenues for Dell by 2027.
In light of these developments, Citi has increased its earnings estimates for Dell by 10%. The firm anticipates additional upside to these estimates as Dell continues to capitalize on its AI potential. The new price target of $125 is based on an implied price-to-earnings (PE) ratio of 14 times the calendar year 2025 estimates, and reflects an enterprise value to EBITDA (EV/EBITDA) multiple of 8.5 times, an improvement from the current trading multiple of 8 times. This valuation adjustment is justified by Dell's strong execution and the identified upside potential.
InvestingPro Insights
In the wake of Citi's optimistic outlook on Dell Technologies Inc (NYSE:DELL), InvestingPro data and tips provide additional context to the company's financial health and market position. Dell's market capitalization stands at a robust $66.86 billion, signaling a strong presence in the market.
InvestingPro Tips indicate that Dell is trading at a low P/E ratio relative to near-term earnings growth, with an adjusted P/E ratio from the last twelve months as of Q3 2024 at 25.63. This suggests that the company's stock may be undervalued given its growth prospects. Additionally, Dell's valuation implies a strong free cash flow yield, an attractive aspect for investors seeking companies with the ability to generate cash.
Moreover, the company's revenue for the last twelve months as of Q3 2024 is reported at $91.15 billion, despite a revenue decline of 13.4% during the same period. This decline is in line with analysts' expectations of a sales decline in the current year. However, Dell's strong free cash flow yield and low P/E ratio provide a counterbalance to concerns about sales growth.
For investors interested in deeper analysis, there are 12 additional InvestingPro Tips available, which can be accessed at https://www.investing.com/pro/DELL. These tips include insights on Dell's performance over various timeframes, such as a high return over the last year and a large price uptick over the last six months, indicating a positive trend in the company's stock performance.
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