This stock price performance seems to have surprised many investors.
computing company Dell Technologies (Dell -1.04%) The company went public in 1988. The business performed well for more than a decade, and stock price performance was sensational in the run-up to the dot-com bubble of the late 1990s. At one time, Dell was valued at about $100 billion.
But from 2000 to 2013, business slumped and the stock price fell by about 75%. Finally, company founder Michael Dell worked out a deal to take the company private again.
Dell's public history seemed to be over. But in 2018, it went public again at about $23 per share (adjusted for subsequent stock splits). This is the reason why I have continued to participate in races ever since.
First, let's explain what happened with Dell 1.0.
Dell's first foray as a publicly traded company ended in disappointment due to repeated failures. First of all, it is mainly the PC business. However, the rise of smartphones and tablets caused disruption, and the company was not successful in launching its own mobile devices.
Dell recognized the need to supplement its low-margin PC hardware business with high-margin software services. According to Reuters, it went on an acquisition spree between 2008 and 2023, acquiring more than 20 other companies. However, this was expensive and business did not grow as expected.
Finally, Michael Dell decided to focus more on the company's issues by taking it private.
Why Dell 2.0 worked so well
On December 28, 2018, Dell returned to the stock market as a publicly traded company, but it wasn't an easy buy. First of all, the company's ownership structure was complex, as all private investors were involved. Additionally, for the six months ending August 3, 2018, Dell posted his $1.2 billion net loss.
Shortly after returning to the market, Michael Dell told CNBC that he had paid off $14 billion in debt while he was private. However, during that time he had invested $21 billion in research and development (R&D). Investing in research and development is good, but it costs a lot of money and the return on investment is questionable.
Because of these questions, Dell returned to the market at a very cheap valuation of just 0.2 times trailing sales. In short, investor confidence was low.
Since then, investors have focused on Dell stock for two big reasons. First, the company has significantly increased its profits. When it returned to the market, the company reported an operating loss. But from fiscal year 2017 to fiscal year 2024 (ending Feb. 2), the company's high-margin services revenue more than doubled to $24 billion. Additionally, management reduced operating expenses during this time.
Thanks to both high margin growth and cost reductions, Dell posted operating income of $5.2 billion in fiscal year 2024, a significant improvement from the losses it suffered when it relisted.
Second, investors have been paying attention to Dell stock lately because of its products that align with the artificial intelligence (AI) trend. The company sells his AI-optimized servers, and businesses are suddenly seeing a lot of interest. In the fourth quarter of fiscal 2024, Dell had a $2.9 billion backlog for these products. This is almost double the backlog of orders in the third quarter.
Operating profit growth and its AI potential are increasing investor confidence in Dell stock. As a result, the stock has soared since its relisting. For a person who invested $5,000 in 2018, that stake is now worth $27,000. And if the dividends were reinvested, that investment would be worth about $29,000.
DELL data by YCharts.
Why I'm cautious about Dell stock right now
It's true that Dell's profits have increased significantly, and that's important. However, as the chart below shows, trailing twelve month earnings have actually declined slightly over the past six years. So the difference for shareholders is their valuation. The price-to-sales ratio (P/S) is up more than 400%.
DELL PS ratio data by YCharts. TTM = trailing 12 months.
In other words, Dell stock's success has more to do with valuation than business, which gives me pause.
We would like to see better growth to have more confidence in investing in Dell. Sure, the company's AI business is clearly growing rapidly, but the company's fiscal year 2024 revenue was his $88 billion. So his $2.9 billion in AI backlog is pretty small by comparison.
Additionally, it's unclear how sustainable Dell's AI growth will be. The company's products are for building on-premises AI capabilities. Companies may abandon this path due to costs in bad economic conditions.
Finally, Dell stock has been a big winner for investors since its relisting. But for today, I think it's better to sit on the sidelines and wait for a better valuation or more clarity on the business' growth potential.
