Artificial intelligence (AI) is reshaping the technology landscape, and many stocks have soared due to the AI boom. However, my focus today is on two standout stocks not often highlighted, which I believe are poised for growth. One key aspect of AI infrastructure is the escalating demand for data processing power, necessitating massive storage and computing capabilities, particularly within hyperscale data centers. These centers, each exceeding 100,000 square feet, are proliferating rapidly. Currently, the count of such facilities surpassed 1,000 in 2024, with researchers predicting an additional 120 to 130 centers being built annually.
Major tech companies are spearheading the construction of these colossal centers. For instance, Elon Musk’s xAI project is developing a 750,000-square-foot data center equipped with 100,000 GPUs, while Microsoft is preparing to establish an enormous center in Wisconsin, sprawling over two square miles. This surge in infrastructure is crucial for companies like Dell Technologies. Dell is a significant provider of the essential components required by these centers, such as racks, storage, servers, and software. The company anticipates that its AI infrastructure market, valued at $91 billion in 2025, will expand to $124 billion by 2027.
Dell's competitive landscape is currently favorable, as one of its main rivals, Super Micro Computer, faces significant financial scrutiny. Supermicro’s stock has plummeted following allegations of financial misconduct, leading to their auditor’s resignation and suggesting potential accounting issues. This turmoil might enable Dell to capture a greater market share as Supermicro navigates these challenges. Dell's recent financial performance underscores its robust position. Data center demands have pushed Dell's servers and networking sales to $7.7 billion last quarter, marking an impressive 80% increase year over year.
Overall, Dell's total quarterly sales reached $25 billion, a 9% rise compared to the previous year, with operating income growing by 15% to $1.3 billion. Although Dell's PC sales have stagnated amidst economic downturns, the potential for an AI-driven upgrade cycle could revitalize this segment. Nevertheless, data center sales remain the primary growth driver. For investors interested in dividends and share buybacks, Dell’s consistent strategy of returning 80% of its free cash flow to shareholders is appealing. Recently, Dell increased its quarterly dividend by 20% to $0.445 per share, offering a yield of 1.3%.
In the first two quarters of fiscal 2025, the company also repurchased $1.4 billion in shares, amounting to 1.6% of its current market cap within six months. Though Dell's stock is currently trading at a price-to-earnings ratio of 24, this valuation drops to 14 on a forward basis. Among the 24 analysts covering Dell, 21 rate it as a buy or strong buy, with an average price target of $146, indicating a potential 12% upside from current prices. However, these projections may be conservative, as they have yet to factor in Dell’s expected business gains from Supermicro's difficulties.
Turning our attention to Amazon, the market seems to be underestimating its strong position within the AI sector, particularly via Amazon Web Services (AWS). AWS, along with initiatives such as Amazon Bedrock and AI chip development, remains a crucial component of Amazon’s AI strategy. As the leading cloud data provider globally, AWS is benefiting immensely from AI’s immense data needs. After a period of stagnation in 2022, AWS revenue has accelerated in recent quarters, with a 19% growth in Q3, pushing sales to $27.5 billion.
More strikingly, AWS's operating income leapt to $10.4 billion, reflecting a 38% margin, up from 30% in the previous year—a testimony to the burgeoning demand for cloud services. Amazon’s overall Q3 income increased by 11% to $159 billion, with total operating income rising to $17.4 billion from $11.2 billion in the prior year. Despite this strong financial performance, Amazon's stock remains historically undervalued when assessed against operating cash flow and earnings.
The market's cautious outlook towards Amazon might be attributed to fears of reduced consumer spending impacting product sales. Nonetheless, I am confident that the lucrative AWS segment will adequately compensate for any downturns in other areas. Given its historical undervaluation and robust cash flow, Amazon presents a compelling long-term investment opportunity.
