Morgan Stanley Maintains Bullish Stance on Dell

Morgan Stanley analysts reiterated their Overweight rating on Dell (NYSE:DELL) with a price target of $155 on the stock. Currently, shares are up more than 3% intra-day.

The analysts' confidence in Dell's potential for outperformance is based on several factors: strong competitive positioning in the rapidly expanding AI server market, improving profit margins, and enhanced execution in the storage sector, which should boost estimates and valuation. Dell remains a top pick with a $155 price target and a bullish scenario reaching $200.

The analysts dismissed concerns about AI server margins that surfaced during the April quarter, projecting an upward trend in these margins over time. They asserted that Dell's AI server gross margins are comparable to those of other leading OEMs, with Dell pricing its AI servers about 10% higher than its peers. Notably, 25% of Dell Financial Services (DFS) originations last quarter were AI servers.

Most of Dell's cloud service provider and enterprise AI server deals include high-margin, sticky services that are deferred and amortized over time, with services making up about 10% or less of the total system price. Management highlighted that more AI server services revenue is currently being deferred than amortized, suggesting that as amortization schedules progress, AI server revenue and gross margins should improve.

The analysts also pointed to a favorable shift towards sovereign and enterprise clients, where margins are significantly better, and the increasing scale of Dell's AI server business. With operating expenses down slightly year-over-year and revenue up in the low double digits, they see a path to stronger AI server margins over time, contrary to current consensus expectations.