Dell Vs. HP: As AI Server Hype Cools, JPMorgan Favors Dell – Dell Technologies (NYSE:DELL)

The AI server boom that once had investors piling into U.S.-branded server stocks is losing steam, and Wall Street isn’t thrilled.

JPMorgan analyst Samik Chatterjee sees mounting near-term challenges for Dell Technologies Inc DELL and Hewlett Packard Enterprise Co HPE, but he’s siding with Dell as the better bet in this AI reset.

The AI Server Party Winds Down

For months, AI servers were the golden goose, but concerns are mounting. Chatterjee outlines four key issues:

1. Margin pressure from advanced AI compute configurations,
2. A more competitive landscape with HPE and Lenovo ramping up,
3. Supply constraints from Nvidia Corp‘s NVDA Blackwell shipments, and
4. Doubts about AI training intensity following DeepSeek‘s recent innovation.

The result?

Dell is down 8% year-to-date and off 26% from recent highs, while HPE has stayed flat.

Super Micro Computer Inc SMCI, which rode the AI wave early, is up 19% YTD but faces its own supply and competition hurdles.

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Dell: AI Hangover But A Broader Recovery Looms

Dell has taken a beating as AI server revenue expectations cooled and broader IT spending remains sluggish. Chatterjee’s forecast trims consensus revenue growth from high-single digits to 4% and EPS growth from 19% to 11%. But with Dell’s valuation at just 12x forward earnings, the downside risk appears contained.

JPMorgan sees a turnaround potential later in the year as traditional IT spending picks up.

For the fourth quarter, Dell’s earnings are expected to slightly exceed consensus, with revenue at $24.8 billion (+11% YoY) and EPS at $2.60 (vs. consensus of $2.52). However, first quarter guidance looks softer, with projected revenue of $23.0 billion (+3% YoY) and EPS of $1.55, below consensus at $1.80.

The bigger challenge? AI server revenue is moderating while traditional IT demand isn’t bouncing back fast enough.

HP Enterprise: AI Server Optimism Keeps It Afloat

HPE has fared better in 2024, thanks in part to optimism around a high-profile deal with Elon Musk‘s xAI. But that doesn’t mean it’s in the clear. AI server revenue is expected to decline in the near term due to limited Blackwell supply and waning demand for Hopper-based systems.

For the first quarter, HPE should hit consensus estimates with revenue of $7.8 billion (+15% YoY) and EPS of $0.49. But the second quarter guidance may disappoint, with revenue projected at $7.8 billion (+9% YoY) and EPS of $0.46, trailing consensus of $0.50.

While HPE benefits from hybrid cloud strength, its AI server momentum isn’t expected to repeat early in FY25.

The Verdict: Dell Over HPE

JPMorgan acknowledges that both companies face headwinds, but Dell’s stock has already absorbed much of the AI server reset. While HPE has an xAI win keeping sentiment higher, Dell’s broader enterprise IT recovery gives it a stronger upside story heading into the second half of 2024.

Bottom line?

The AI server craze is cooling, but for those looking to position for a rebound, Dell appears to be the more de-risked bet.

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