Growing demand for artificial intelligence servers should boost shares of Dell Technologies over the long haul, according to Morgan Stanley. Analyst Erik Woodring named Dell a top pick within the IT hardware space, viewing a mounting $2 billion server backlog as a multi-quarter upside driver for shares. “With signs of hardware spend stabilizing, AI server emerging as a driver of revenue/profit upside, stepped-up capital return commitments and S & P inclusion still ahead of us, and solid execution/cost mgmt driving profitability upside, we are moving DELL to our Top IT Hardware Pick,” Woodring wrote, replacing Apple , the previous top name in the sector. The sentiment shift from Morgan Stanley comes on the heels of a stronger-than-expected quarterly print from Dell that boosted shares nearly 10% before the bell Friday. The company topped Wall Street’s estimates on the top and bottom lines and offered better-than-expected guidance as the demand environment improves and the AI boom continues. Woodring referred to Dell as the first company within the firm’s coverage to directly gain from the spending cycle around generative AI. Recent checks seem to confirm that the Dell plans to build between 15,000 and 25,000 servers in 2023 and 2024, with most of those volumes going to software-as-a-service companies, he added. “Importantly, this opportunity is incremental and not yet cannibalistic to general purpose server demand,” Woodring wrote. “When we then consider the Gen AI story is still in its infancy – with demand outstripping supply – we believe AI servers can remain a model tailwind for years to come.” Given this setup, Woodring lifted the firm’s price target to $70 a share, representing 24% upside from Thursday’s close. Shares have rallied nearly 40% this year. Along with the AI story, Morgan Stanley views stabilizing hardware spending and better cost management and execution as key to Dell’s upside from here. These factors also support a premium valuation to peers such as HP . DELL YTD mountain Dell shares have gained about 40% in 2023 A potential S & P 500 inclusion should also benefit Dell and expand the investor base for shares, Woodring added. Other Wall Street firms offered a similarly bullish tone on Dell post-earnings, with Evercore ISI referring to the company as the “AI beneficiary you didn’t know about.” Bernstein’s Toni Sacconaghi also said: “We believe that the company will continue to be a structural share gainer and a best-in-class operator over the long term, and see likely incremental capital return and potential index inclusion as potential catalysts.” — CNBC’s Michael Bloom contributed reporting
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