Barclays upgraded Dell Technologies (NYSE:DELL) from Underweight to Equal Weight in a note Tuesday, citing a significant reduction in AI-related hype that initially influenced their bearish outlook.
According to Barclays, much of the AI-driven speculation has been "washed out of the share price," which reduces the downside risk.
Despite the upgrade, Barclays remains cautious about Dell's enterprise server, storage, and PC segments.
Barclays expressed concerns about the sustainability of Dell's AI revenues and the impact on margins. Since Dell reported its FQ1 earnings on May 30th, its stock has fallen around 34%, reflecting market concerns over these structural issues, Barclays noted.
The bank's analysts also highlighted that Dell's AI orders and revenues have been strong but warned of potential volatility and competitiveness in the market.
Barclays says that one area of concern is Dell's customer base, with receivables from low-quality customers rising sharply, from mid-teens to almost 50%.
Additionally, the bank estimates that Dell's AI servers have gross margins around 12.5% or lower, which is less profitable compared to other products. Moreover, they pointed out that they have "yet to see any meaningful pull-through from AI into other areas of the business areas" like storage or services.
Dell's current valuation trades at approximately 11 times Barclays' CY25 EPS estimate, a premium compared to peers like HPE and HPQ.
Barclays believes this higher multiple is justified due to Dell's AI business contribution. However, they remain cautious about the broader market challenges in PCs and traditional servers, which they believe the AI business alone cannot offset.
Despite these concerns, the analysts acknowledge that the previous Underweight thesis has been "proved out", leading to the upgraded rating.