Why Dell's Post-Earnings Sell-Off Is a Christmas Gift Before a Huge 2025

When a stock sells off on short-term concerns, that can be a huge opportunity for long-term oriented investors.

This might be the case today with Dell Technologies (NYSE: DELL), which took a hit after its recent fiscal third quarter earnings.

But the PC and server supplier could see both of its businesses inflect higher in 2025. With the stock now trading back 30% below its highs, here's why long-term investors should aim to pounce ahead of next year.

What was wrong with the quarter?

In its third quarter, Dell saw revenue grow 10% to $24.4 billion, while adjusted (non-GAAP) earnings per share grew 14% to $2.15. While that marked pretty solid growth given Dell's mature business lines, that revenue figure actually fell just short of analyst estimates. On the other hand, Dell's bottom line, bolstered by prudent cost management and efficiencies, exceeded estimates.

The problem, however, was Dell's guidance. Management forecast revenue between $24 billion and $25 billion and adjusted earnings per share between $2.40 and $2.60 for the current fourth quarter. While that would mark another 10% year-over-year revenue gain and 13% EPS gain at the midpoint, it was also less than $25.59 billion and $2.65 analysts had been expecting.

The disappointing outlook caused Dell's stock to drop double-digits the next day. Shares now trade 29% off their highs from earlier in the year.

But the softness should be temporary

Dell's forecast for the fiscal fourth quarter disappointed on two fronts: PCs and AI servers. The PC business has been in a big downturn ever since 2022 after the pandemic binge-buying, and investors are growing impatient with the prospects for a turnaround. Meanwhile, given that artificial intelligence appears to be on a high-growth trend with no signs of slowing down, especially given Nvidia's recent earnings, it was surprising to see management guide below expectations.

But there are some very valid reasons the current quarter may be soft.

On AI servers, it's pretty clear that despite high demand, customers are awaiting the new Blackwell chip from Nvidia. Because of a production mask defect, the chip has been delayed for a couple of months. Thus, some large data center customers may be holding off a bit until more Blackwell chips become available later in December and into January.

That affected the third quarter, which actually saw AI server shipments fall 6.5% relative to Q2. Given the weaker-than-expected guidance, it's possible AI shipments could fall or flatline again.

But investors shouldn't extrapolate that softness to the long-term picture. On the conference call with analysts, management noted Dell's AI server backlog had grown to $4.5 billion, up 18.4% relative to the prior quarter's $3.8 billion. In addition, Dell also noted its "pipeline," which is sort of an immediate addressable market it sees over the next five quarters, grew an even higher 50% on a sequential basis.

As long as the demand signals from Dell's backlog and pipeline translate roughly to revenue conversion, investors probably shouldn't sweat Q4 guidance. Once Blackwell is fully ramped to high volumes -- likely in the beginning of calendar 2025 -- growth should start again.

Don't sleep on a 2025 PC boom either

In addition to AI servers, a PC recovery hasn't really materialized, either. Dell's client demand was actually down slightly both on an annual and sequential basis.

Although some predicted a recovery by now, Dell management said consumers were still shy about upgrading PCs amid higher interest rates, while corporations also remain cautious. This is in spite of an aging PC base that was bought in the 2020-2021 period, and the advent of the "AI PC" this year, which can perform some artificial intelligence inferencing on device.

But in October 2025, the Windows 10 operating system will be phased out, meaning lots of big enterprises will need to upgrade their computers. On the call, Dell mentioned customers were waiting until early 2025 to decide, given that the AI PC is new, and several new processors are just hitting the market now and into the new year. CEO Jeffrey Clarke said Dell received a, "clear signal that enterprises are balancing their need to refresh and their desire to future-proof their purchases."

So like the AI server market, an acceleration for Dell's PC business is a question of when, not if, before the Windows 10 phaseout next October.

Dell is back in cheap territory

Though Dell's multiple has expanded since before the AI revolution hit, it's still relatively cheap for an AI stock at just 22 times trailing earnings. Down this much, Dell seems like a solid pickup this holiday season. Although the next quarter may disappoint, Dell's key segments seem highly likely to accelerate next year.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.