A Strong Bull Case With Built-In Safety

Dell stock appears undervalued, driven by ISG growth and supported by a solid margin of safety, despite challenges in the CSG segment.

By Bernard Zambonin

Summary

• Dell’s stock has faced recent stagnation but the company’s core business remains strong, especially in its ISG segment driven by AI.
• The CSG segment is struggling with weak margins and low growth, but there’s still potential for moderate recovery through AI-driven PC demand.
• Dell’s ISG segment is highly valuable with a projected equity value of $87.9 billion, making up the majority of the company’s overall value and offering significant upside potential.

Dell Technologies (DELL, Financial) has undoubtedly been one of the biggest beneficiaries of the AI boom, with its server business seeing rapid growth over the last couple of years.

However, since peaking in late May 2024, Dell’s stock seems to have hit a wall. There’s been a perception in the markets of stagnation, with concerns about the company’s ability to maintain the same growth rates it saw throughout 2024.

That said, Dell’s business is now essentially divided into two main segments: (1) Client Solutions Group (CSG), which covers products like personal computers, laptops, desktops, and accessories; and (2) Infrastructure Solutions Group (ISG), which provides enterprise-level IT infrastructure, including servers, storage, networking, and cloud solutions.

Given this structure, one solid approach to valuing Dell’s stock could be to use a reverse discounted cash flow (DCF) analysis, combining the value of both parts of the business. That’s exactly what I’ll dive into in this article.

Valuing Dell’s CSG Business

Let’s start by looking at Dell’s Client Solutions Group (CSG), which currently makes up about half of the company’s revenue in Fiscal 2025 ($48.393 billion out of a total of $95.567 billion). However, this segment has faced some challenges in recent years, even shrinking by 1% in Fiscal 2025 compared to the previous year.

In addition, the CSG segment has struggled with operating margins, which currently sit at 6% in Fiscal 2025, down by 1.44 percentage points year-over-year. This is a stark contrast to the ISG segment, which has maintained operating margins of around 13%, staying relatively flat year-over-year.

Dell’s management attributes the weaker margins in the CSG business to soft demand for PCs, although Dell is arguably well-positioned to benefit from the upcoming AI-driven PC refresh cycle.

Given this, I think it’s reasonable to expect that the CSG business can deliver low-to-mid single-digit growth, which aligns with Dell’s FY2026 guidance.

For the reverse discounted cash flow (DCF) analysis, I’ll assume that the CSG business will reach a plateau after AI-driven demand for PCs settles. As a result, I expect revenue growth to decelerate by 1% year-over-year for the other next four years before normalizing to a perpetuity growth rate of 2%.

When it comes to profitability, even though the operating margins have been weak, I’m going to cautiously assume that Dell will be able to maintain the 6% margin over the next few years. However, the higher-margin workstations and premium consumer PCs might lead to a slight increase in margins as time goes on.

As for working capital, I’m conservatively assuming that the company won’t generate any additional cash flow, despite the fact that in the previous financial year, Dell did see an increase in cash flows from inventory management and accounts payable improvements across its entire business.

Lastly, because there’s a higher risk associated with CSG’s consumer-facing and more volatile market, it makes sense for the discount rate for this business to be higher than for ISG. While Dell’s overall business has a beta of 0.9 (meaning it’s not a highly volatile company), I believe it’s reasonable to apply a 10% discount rate to future cash flows for the CSG segment.

With these assumptions, I estimate an equity value for Dell’s CSG business of $5.1 billion. If we assume a more aggressive discount rate of 9%, the equity value would rise to $9.2 billion.

Valuing Dell’s ISG Business

Now, let’s shift the focus to Dell’s Infrastructure Solutions Group (ISG), which is where the majority of Dell’s equity value is concentrated. While the ISG segment represented 45% of the company’s total revenue in Fiscal 2025, it generated nearly double the operating profit of the CSG segment. This is primarily driven by the high demand for Dell’s AI servers, along with resilient demand for its traditional server solutions.

According to Dell’s management, the strong performance in ISG’s operating margins has been fueled by the company’s IP storage portfolio. These storage solutions are specifically designed to support AI workloads, helping businesses leverage their AI capabilities more effectively.

Thanks to this excellent execution, Dell has issued guidance for Fiscal 2026, expecting the ISG segment to grow in the high teens. Assuming this guidance is met, I’ll conservatively forecast 15% growth for the next four quarters. As for operating margins, I’ll also conservatively assume they will level off at 12% for the next five years, mainly because Dell’s AI server business is margin-dilutive. This means it may reduce overall profitability at times due to the sales mix.

Looking ahead, I plan to apply a lower discount rate for Dell’s ISG business compared to the CSG business. This is because ISG benefits from stronger margins, greater scalability, and more stable cash flow thanks to long-term contracts and established relationships with enterprise clients. Therefore, a 9% discount rate seems reasonable—and even a bit conservative—for this segment, especially since it’s still well above the 10-year treasury yield.

With all these assumptions in place, I estimate that Dell’s ISG business has an equity value of $87.9 billion. In other words, the segment most exposed to AI trends is worth about 17 times more than Dell’s client solutions business.

The Verdict

When we add everything up (CSG+ISG), we get an equity value of $93 billion for Dell Technologies. Dividing this by the 705 million shares outstanding gives us a price target of around $132 for Dell stock, which implies an upside potential of about 39% based on the current share price as I write this.

Of course, this is a speculative exercise, and its accuracy depends entirely on the assumptions I make. Ideally, it would be better to use net debt specific to each segment, but unfortunately, that data isn’t available. That said, using the company’s total net debt for the calculations still provides a larger margin of safety, which supports the equity value we’ve calculated.

At the end of the day, the key takeaway for investors is that even with mostly conservative assumptions for both segments, there appears to be a significant margin of safety in holding Dell stock for the long term. With that in mind, I remain bullish on Dell, believing that the stock is undervalued given the current circumstances, and it could present a compelling entry point.