Nine months ago, I explained how I booked a 177% profit on PC maker Dell Technologies (NYSE: DELL). Actually, it was a call option on Dell that produced that outsized gain. A call option increases in value when the price of the underlying security goes up.

The year before, I recommended Dell to my PF Pro readers when its share price fell below $50. I felt the stock was severely undervalued and wanted to get in on it before Wall Street started buying it up.

However, I did not know the company was about to make a game changing announcement. In July 2023, Dell revealed that it was partnering with NVIDIA (NSDQ: NVDA) to offer a suite of new artificial intelligence (AI) products.

That day, Dell closed a little under $53. By the time I closed out my call option trade two months later it had risen to $70.

That was the kind of share price move I was expecting. My PF Pro stock screener routinely identifies stocks that are on the verge of a breakout to the upside.

But what happened since then has surprised even me. Over the past eight months, Dell has more than doubled in price. At the start of this week, it traded above $150 for the first time ever.

Sweet Music

The big share price move occurred on March 1. The evening before, Dell released its fiscal 2024 Q4 and full year financial results.

At first glance, some of those numbers were discouraging. During the fourth quarter of last year, Dell’s net revenue fell 11% on a year-over-year basis.

The company’s non-GAAP (generally accepted accounting principles) operating income was 1% lower than the year before. Even worse, its adjusted free cash flow plummeted by 55%.

However, the rest of the news was quite good. Dell’s operating income rose by 25% during the quarter, and its net income jumped a whopping 91%. The net result was an 89% rise in diluted earnings per share.

More important was the reason why Dell’s profitability grew at such an astounding rate. According to Dell’s chief operating office, Jeff Clarke, “Our strong AI-optimized server momentum continues, with orders increasing nearly 40% sequentially and backlog nearly doubling.”

‘We’ve just started to touch the AI opportunities ahead of us,” Clarke added, “and we believe Dell is uniquely positioned with our broad portfolio to help customers build GenAI solutions that meet performance, cost and security requirements.”

That last sentence was sweet music to Wall Street’s attentive ears. Any company that can rightfully claim to have a first mover advantage in the AI market is in high demand these days.

Sour Grapes

Dell has tripled in share price since I first recommended it to my readers two years ago. Now, I wonder if it has become overvalued.

The fact that Dell has risen so much in such a short period of time does not necessarily mean that it will soon reverse direction. It is a fundamentally different company now than it was then.

That is why I first look at the forward price-to-earnings ratio (FPER) to get a feel for how “hot” a stock is. The FPER is simply the expected per shares earnings for a company over the next twelve months divided into its current share price.

At the start of this week, the FPER for Dell was 19.8 compared to a multiple of 21.6 for the S&P 500 Index. In other words, Dell is trading at a discount to the overall stock market despite its recent share price surge.

That inference is confirmed by Dell’s price-to-sales ratio of 1.2, which is less than half the 2.8 ratio for the index. If Dell is overvalued, it is not yet showing up in its basic operating metrics.

Also, Dell bumped its quarterly cash dividend by 20% this year. That can sometimes be misconstrued by Wall Street as a sign that the company has more money than it knows what to do with. This time, I think that may just be a case of sour grapes.

I believe the dividend hike was at the behest of Michael Dell. He owns nearly 35 million shares of the company he founded. At a forward annual distribution rate of $1.78 per share, that works out to roughly $62 million in dividend income to him this year.

A few years ago, Michael Dell contemplated taking his company private. Instead, he channeled his resources into making the conversion to AI. So far, it looks like he made the right decision.

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