Microsoft has entered into a $9.7 billion cloud services contract with artificial intelligence cloud service provider IREN that will give it access to some of Nvidia’s chips.
The five-year deal, which includes a 20% prepayment, will help Microsoft as it looks to keep up with AI demand. Last week the software maker reported its quarterly sales grew 18% to $77.7 billion, beating Wall Street expectations while also surprising some investors with the huge amounts of money it is spending to expand its cloud computing infrastructure and address the growing need for AI tools.
Microsoft spent nearly $35 billion in the July-September quarter on capital expenditures to support AI and cloud demand, nearly half of that on computer chips and much of the rest related to data center real estate.
“IREN’s expertise in building and operating a fully integrated AI cloud — from data centers to GPU stack — combined with their secured power capacity makes them a strategic partner,” Jonathan Tinter, president of business development and ventures at Microsoft, said in a statement. “This collaboration unlocks new growth opportunities for both companies and the customers we serve.”
Microsoft also announced new deal with OpenAI last week that pushed the Redmond, Washington, company to $4 trillion in valuation for the second time this year. The agreement gives the software giant a roughly 27% stake in OpenAI’s new for-profit corporation but changes some of the details of their close partnership. Microsoft’s $135 billion stake will be just ahead of the OpenAI nonprofit’s $130 billion stake in the for-profit company.
IREN also said Monday that it signed a deal with Dell Technologies to buy the chips and ancillary equipment for about $5.8 billion. The Australian company anticipates the chips being deployed in phases through next year at its Childress, Texas campus.
Shares of IREN jumped 22% before the opening bell in the U.S. Shares of Microsoft rose slightly,.
One of the biggest themes in the markets for the last two years has been artificial intelligence (AI).
Naturally, famed entrepreneur Elon Musk has found himself at the center of the AI revolution — and he just gave investors a big reason to seriously consider both Dell Technologies(NYSE: DELL) and Super Micro Computer(NASDAQ: SMCI).
Let’s explore how Musk is working with these AI leaders, and assess if these stocks are good buys right now.
What did Elon Musk just say?
In addition to running Tesla and social media platform X (formerly Twitter), Musk is also managing an AI start-up, called xAI.
xAI is building a chatbot called Grok, and is aiming to compete with the likes of OpenAI. Musk is a co-founder of OpenAI but abandoned the project back in 2018. Since his departure, Musk has gotten into many publicized tiffs with OpenAI’s CEO, Sam Altman, over safety concerns and how AI should be used in society.
Namely, Musk took to X to tell investors and AI enthusiasts that xAI will be partnering with Dell and Supermicro to build its AI infrastructure such as server rack solutions and factory architecture.
How Dell and Supermicro stand to benefit
AI has many different components. One of the biggest bellwethers for AI at the moment are specialized chips known as graphics processing units (GPUs). These chips are used to train large language models and other computing functions to develop generative AI applications.
Right now, Nvidia is the undisputed leader of AI chips — owning an estimated 80% share of the market.
However, deploying chips into machine learning models and other use cases is only part of the broader equation. Companies such as Dell and Supermicro specialize in a different area within the chip realm.
Both Dell and Supermicro are major players in AI infrastructure solutions. Essentially, both companies specialize in designing integrated systems architecture, server racks, and storage clusters for data centers.
Considering xAI just raised $6 billion in funding back in May, Dell and Supermicro appear well positioned to benefit from AI tailwinds as xAI moves swiftly to catch up with the competition.
Image source: Getty Images.
Dell, Supermicro, both, or neither?
On the surface, owning different businesses across the semiconductor landscape might be a good idea. AI is still in its infancy, and there are many different applications among chip companies that are playing a role in the technology’s development.
With that said, a close look at valuation should shed some light on investing in Dell and Supermicro in particular.
DELL PE Ratio Chart
The chart above illustrates the price-to-earnings (P/E) multiple for Dell and Supermicro over the last few years. While neither stock looks cheap, Dell is clearly trading at a noticeable discount to Supermicro. With that said, Supermicro’s premium is arguably warranted considering how fast the company is growing.
Moreover, one of my biggest knocks against Supermicro has been that the company relies heavily on business from Nvidia — a dynamic that could hurt the company in the long run as more companies design competing chips.
Now, with a nod of approval from Musk and xAI, I’m more optimistic about Supermicro’s prospects of branching out and earning meaningful business from new customers in the AI space.
At the end of the day, allocating a portion of your AI holdings to both Dell and Supermicro could be a good idea for long-term investors. If I had to just choose one company, I think Dell is the better value compared to Supermicro based on its lower P/E and diversified business. Considering Supermicro is still relatively small, I think its valuation needs to continue normalizing before it looks like a bargain opportunity.
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Dell Technologies Inc. (NYSE:DELL – Get Rating) has been assigned an average rating of “Hold” from the eighteen brokerages that are covering the firm, Marketbeat Ratings reports. Seven investment analysts have rated the stock with a hold recommendation and six have given a buy recommendation to the company. The average 12-month price target among analysts that have issued a report on the stock in the last year is $49.63.
A number of brokerages recently issued reports on DELL. UBS Group reduced their price target on Dell Technologies from $65.00 to $60.00 and set a “buy” rating on the stock in a research report on Tuesday, November 22nd. Jefferies Financial Group began coverage on Dell Technologies in a research report on Monday, October 31st. They set a “hold” rating and a $39.00 price target on the stock. Bank of America reduced their price target on Dell Technologies from $60.00 to $55.00 in a research report on Tuesday, November 22nd. Morgan Stanley reduced their price target on Dell Technologies from $54.00 to $45.00 and set an “equal weight” rating on the stock in a research report on Monday, October 17th. Finally, Deutsche Bank Aktiengesellschaft reduced their target price on Dell Technologies from $55.00 to $48.00 in a report on Tuesday, November 22nd.
Insider Buying and Selling
In related news, insider William F. Scannell sold 91,938 shares of the firm’s stock in a transaction on Wednesday, December 14th. The stock was sold at an average price of $42.62, for a total transaction of $3,918,397.56. Following the completion of the transaction, the insider now directly owns 178,627 shares of the company’s stock, valued at approximately $7,613,082.74. The sale was disclosed in a filing with the SEC, which can be accessed through the SEC website. 47.30% of the stock is owned by corporate insiders.
Institutional Inflows and Outflows
Several large investors have recently bought and sold shares of DELL. Cambridge Investment Research Advisors Inc. raised its position in Dell Technologies by 17.7% during the 1st quarter. Cambridge Investment Research Advisors Inc. now owns 14,076 shares of the technology company’s stock worth $706,000 after purchasing an additional 2,117 shares during the last quarter. D.A. Davidson & CO. bought a new position in shares of Dell Technologies in the 1st quarter worth about $304,000. MetLife Investment Management LLC bought a new position in shares of Dell Technologies in the 1st quarter worth about $568,000. Rhumbline Advisers raised its position in shares of Dell Technologies by 2.0% in the 1st quarter. Rhumbline Advisers now owns 254,266 shares of the technology company’s stock worth $12,762,000 after acquiring an additional 4,949 shares in the last quarter. Finally, Yousif Capital Management LLC raised its position in shares of Dell Technologies by 5.2% in the 1st quarter. Yousif Capital Management LLC now owns 6,090 shares of the technology company’s stock worth $306,000 after acquiring an additional 302 shares in the last quarter. 26.42% of the stock is owned by institutional investors.
Dell Technologies Trading Down 1.7 %
Shares of NYSE DELL opened at $40.31 on Tuesday. The firm has a market cap of $28.87 billion, a P/E ratio of 16.94, a price-to-earnings-growth ratio of 0.53 and a beta of 0.98. Dell Technologies has a 1-year low of $32.90 and a 1-year high of $61.54. The business’s 50 day moving average is $41.29 and its 200-day moving average is $40.73.
Dell Technologies (NYSE:DELL – Get Rating) last announced its earnings results on Monday, November 21st. The technology company reported $2.01 earnings per share for the quarter, topping analysts’ consensus estimates of $1.32 by $0.69. The company had revenue of $24.72 million for the quarter, compared to analyst estimates of $24.61 billion. Dell Technologies had a negative return on equity of 208.47% and a net margin of 1.74%. The firm’s quarterly revenue was down 6.4% compared to the same quarter last year. During the same quarter last year, the company earned $2.37 earnings per share. Analysts forecast that Dell Technologies will post 6.43 EPS for the current year.
Dell Technologies Dividend Announcement
The business also recently announced a quarterly dividend, which will be paid on Friday, February 3rd. Investors of record on Wednesday, January 25th will be given a dividend of $0.33 per share. This represents a $1.32 annualized dividend and a yield of 3.27%. The ex-dividend date is Tuesday, January 24th. Dell Technologies’s dividend payout ratio is currently 55.46%.
Dell Technologies, Inc is a holding company, which engages in the provision of information technology hardware, software, and service solutions through its subsidiaries. It operates through the following segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment includes servers, networking, and storage, as well as services and third-party software and peripherals that are closely tied to the sale of ISG hardware.
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