Dell's stock is well off its highs. This analyst sees opportunity for investors.

By Emily Bary

Melius Research is still upbeat about Dell's earnings potential, although analyst acknowledges the company needs to soothe investors' margin fears

Dell Technologies Inc. shares ended last week down almost 50% from their May highs. What should investors make of the stock at current levels?

There are a number of reasons Dell shares (DELL) have sold off lately, according to Melius Research analyst Ben Reitzes. For one, investors worry that the server business is full of "empty calories," given margin concerns raised by Dell's earnings report roughly two months ago and by Super Micro Computer Inc.'s (SMCI) more recently.

Opinion: Super Micro's 10-for-1 stock split can't mask its tough new reality

Plus, supplier Intel Corp. (INTC) is having execution issues, artificial-intelligence personal computers haven't taken off and investors are generally fearful that Tier 2 cloud customers could eventually pull back on AI spending if the technology doesn't yield the requisite return on investment, Reitzes said. The company reportedly has also conducted a big wave of layoffs.

"Through a reorganization of our go-to-market teams and an ongoing series of actions, we are becoming a leaner company," a Dell spokesperson said. "We are combining teams and prioritizing where we invest across the company."

Reitzes said that Dell's stock is now "trading like a good old-fashioned hardware company again - which could be an opportunity."

Dell's stock is up more than 4% in Monday morning trading, while Super Micro's stock is up 8.3%.

The company wouldn't be making sizable layoffs if it didn't need to, in Reitzes' view, and he expects to hear more on the topic when Dell reports earnings later this month. But he still believes the company can see its earnings power grow to upwards of $10 a share within the next year and a half, compared with $7.13 for fiscal 2024.

"If our forecast is accurate, that would mean shares are trading at a [sub-10x price-to-earnings multiple] on normalized earnings, which is very attractive into hardware product cycles," Reitzes wrote.

Still, investors may require more enticement than that, specifically in the form of evidence from Dell that it's making margin progress. Specifically, they "need to be convinced margins can really go up from what Dell called a 'trough' in [the first quarter of 2025]," Reitzes said. The company reported a 6.6% margin then on earnings before interest and taxes.

See also: Super Micro gave a whopping revenue forecast. Here's why that's not enough.

There are a few other factors for Dell investors to monitor, including the prospect of shipment delays for Nvidia Corp.'s (NVDA) new Blackwell chip. but "a potential 3-month or so delay in shipments of Blackwell solutions from Nvidia doesn't seem like a problem for Super Micro's revenue at all," judging by that company's earnings report last week, "nor should it be for Dell's revenues," Reitzes said.

Additionally, since Dell "is known to be primarily an Intel shop," it's worth paying attention to continued execution issues there.

"Asking Dell about whether Intel's front page woes have an impact on corporate PC and server sales is fair game," Reitzes wrote. "However, it's important to remember that Dell is simply a pass-through mechanism here - which could lessen any impact on margins."

Reitzes himself will be looking for traction in the enterprise-AI market, which he thinks could bode well for Dell. "The enterprise is an area Dell could potentially differentiate vs. Super Micro given its longstanding role as a more strategic vendor for corporations and governments," he wrote.

He cut his price target on Dell's stock to $138 from $186 on Monday but kept a buy rating.

See also: Nvidia is one of BofA's top 'rebound' stock picks. Here are the others.

-Emily Bary

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08-12-24 1124ET

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