Dell’s earnings blowout makes clear now is not the time to go against the AI grain
Don’t fight with the tape. That’s the message from the strategists at Piper Sandler on Friday morning, and you know what, it’s hard to disagree with their view. “The market’s price action continues to remind us of a simple mantra from the movie Maverick: ‘Don’t Think, Just Do,’” they wrote. “Major trends are firmly bullish and reward investors who avoid over-analyzing macro noise and instead follow the lead of the band. Investors are catching the market grind to new highs by following momentum leaders and avoiding laggards.” More importantly, in most cases the winners win thanks to wins and not just multiple expansions. Take a look at server maker Dell Technologies, the latest company to report a boom in quarter after boom in AI spending. If you’re just looking at price action (shares were up over 30% on Friday), you could be forgiven for thinking we were starting to see bubble behavior. But it’s not a bubble if the fundamentals support it, as they have since the start of Nvidia’s historic run following the launch of ChatGPT in late 2022. This is definitely Dell’s case. Wall Street raised its fiscal 2027 full-year earnings forecast to $16.85 per share from $13.12 before Thursday night’s report, according to FactSet data. Meanwhile, estimates for the next fiscal year rose from $15.18 per share to $20.21. This represents an increase of 28.4% on FY27 figures and a 33% increase on FY28 figures. What this means is that despite the rise in the stock, based on Friday’s $410 share price, the price-to-earnings ratio has only increased from 24.2x to 24.3x based on FY27 numbers. In FY28 numbers, the stock trades at roughly 20.3 times earnings; That’s actually below the 21 times we thought we were looking at on Thursday before we learned the estimates were too low. Simply put, price action will make you think this is unsustainable. That’s exactly what people were saying about Nvidia after its legendary May 2023 earnings report, where Wall Street realized just how offside the coming earnings wave was. The thing is, if you’re looking at these moves and thinking you should bet against them, think again. The boom in AI spending is real. We’re now seeing Wall Street catching on to what hyperscale CEOs are saying: The AI opportunity is much bigger than most could imagine, and spending on data centers and computing infrastructure is required. In this context, the number of customers for Dell’s AI servers has increased by more than 50% in the last six months, reaching more than 5,000. Talk about expanding demand, something Nvidia was preaching when it reported last week. Nvidia and Dell are close partners, and Nvidia is the clear winner this quarter. We hope this will become clearer in the coming days as CEO Jense Huang delivers the keynote at Computex in Taipei. At the same time, no matter how impressed we are by the numbers, we’re not advocating pursuing such a move at Dell. The reason for proceeding with caution has more to do with market mechanics and less to do with fundamentals or valuation. Many people have made a lot of money, and some profit should be expected when this happens. Consider this: Some fund managers with Dell positions may now be exceeding an appropriate weighting thanks to these massive gains, forcing them to strip some. This gets to the idea of why we like to shorten stocks after parabolic moves. In this case, we say that you should wait for a name like Dell to calm down before opening a position. This can certainly make this a difficult market to earn money to work with, but what we can do is follow the winners and predict revisions and use this to create a target list similar to our Bullpen watch list that we can revisit when volatility hits (as it always does). As for the AI stocks we already own, this is further proof that despite all the money being made in the AI trade – whether it’s in semiconductors like Nvidia, power, or networking infrastructure – there’s still a lot of upside to be had as demand is out of the box. (Jim Cramer’s Charitable Trust is long NVDA. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
