Why Dell's (DELL) Momentum Can Continue

“Momentum” is a word you hear a lot when people are talking about stocks. It is usually used in a trading context, where it refers to a bandwagon effect in which buying prompts more buying, or selling prompts selling.

Momentum is a useful thing for traders who get in and out of positions quickly: If your holding time for a stock is measured in minutes, or maybe a few days, then buying high and selling higher is a useful tactic.

From an investing perspective, however, the problem with momentum is that the most useful thing about it is not identifying it, but knowing when it will turn. If you are looking to hold a stock for months or years, then by the time momentum is identifiable, it is likely that most of the value has long gone.

There is, though, another kind of momentum that can influence a stock: fundamental business momentum. That is when a company’s products or services are successful, and that success breeds further success. The most sustainable momentum is when a stock’s technical signals and the fundamental aspects of the business are combined, and that is what is happening right now with Dell Technologies (DELL).

The technical momentum in the stock is obvious from the chart above. DELL is up 193% over the last year, massively outpacing the 26% gain shown by SPY, the S&P 500 tracking ETF. Normally, for most investors, that would be more of a sell signal than a buy sign. But in this case, the fundamental momentum is really only just beginning, making the stock a decent buy at current levels in spite of as well as because of its performance over the last year.

The reason is something that you have no doubt heard a lot about over the last few months: AI.

Dell is not the first name people think of when they think of AI. It is a company that is better known to most for its legacy businesses in the areas of PC and printer manufacturing and sales. Some may know that they were also involved in the enterprise server business, but the cloud computing trend was not particularly kind to them until quite recently. They were involved, but never reached the level of success achieved by the likes of Amazon (AMZN) and Google parent Alphabet (GOOG).

When it comes to the new generation of AI capable servers, however, they are one of the market leaders.

Most recently, they announced a big Tier 2 CSP AI server win that Morgan Stanley estimates will bring in around $2 billion of revenue. Obviously, that is useful, but its direct impact is already priced into the stock to some extent. What is not, however, is the indirect impact from the momentum that that win will provide.

Smaller businesses looking to add AI capability will be more inclined to use Dell’s offering now because their IT buyers and managers are human beings, and as such will be impressed by that massive order making Dell a gold standard must-have among AI-capable servers.

It is the kind of momentum that Nvidia (NVDA), a major supplier to Dell, has experienced and, as most are aware, the first 200% or so of gains in that stock were just the beginning. The difference, though, is that NVDA has a forward P/E right now of around 38 whereas DELL’s is just under 18. A very basic calculation on that basis implies a lot more upside for DELL as traders and investors price in the potential for new business, not just the reality of actual orders.

I am not saying that DELL will show the kind of explosive gains that NVDA has seen over the last couple of years, but simply that there is no reason to believe that the stock’s momentum is about to dissipate, let alone turn. That makes DELL a buy because of its momentum on both the technical and fundamental fronts, and something that investors looking to play the AI boom should consider for their portfolios.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

DELL

Other Topics

Technology Artificial Intelligence