When dealing with stocks, the term “momentum” often crops up in conversations, indicating a cascading effect where buying begets more buying, and selling begets more selling.
For traders who swiftly navigate in and out of positions, leveraging momentum by buying high and selling higher can be advantageous.
Nonetheless, from an investing standpoint, the challenge with momentum lies not in identifying it but in predicting its shift. For those eying stocks for months or years, by the time momentum reveals itself, the majority of the value may have already evaporated.
However, there exists a different kind of momentum that exerts influence on stocks: fundamental business momentum. It arises when a company’s products or services enjoy success, creating a cycle of further achievements. The most enduring momentum combines a stock’s technical signals with the fundamental aspects of the business, exemplified in the current scenario with Dell Technologies (DELL).
The evident technical momentum in DELL is showcased by the chart above. With a staggering 193% surge over the past year, Dell has significantly outperformed the 26% rise of the S&P 500 tracking ETF, SPY. Normally, such robust growth might trigger a sell signal, but in this scenario, the fundamental momentum is just kicking in, rendering the stock a compelling buy at its current levels despite, or perhaps because of, its performance over the previous year.
The catalyst behind this surge is a buzzword you’ve likely encountered frequently in recent months: AI (Artificial Intelligence).
Dell’s Evolution in the AI Space
Although Dell may not be the initial name that springs to mind in AI discussions, the company is more renowned for its enduring presence in PC and printer manufacturing sectors. While some are aware of its prior engagements in the enterprise server domain, the advent of cloud computing did not particularly favor Dell until relatively recently. Despite some involvement, Dell hadn’t achieved the same level of success as industry giants like Amazon (AMZN) or Google’s parent company, Alphabet (GOOG).
However, Dell has emerged as a frontrunner in the new era of AI-capable servers. Notably, the company recently secured a lucrative Tier 2 CSP AI server contract, predicted by Morgan Stanley to generate around $2 billion in revenue. While this development has already been factored into the stock’s price to a certain extent, the indirect repercussions from this win are yet to be fully realized.
With small businesses seeking to integrate AI capabilities, Dell’s offerings are now more appealing, as their IT stakeholders, being human, will likely be swayed by Dell’s newfound status as a premier provider of AI-capable servers due to the significant order they secured.
Comparing Momentum: Dell Versus Nvidia
This trajectory mirrors the momentum witnessed by Nvidia (NVDA), a key supplier to Dell. The initial 200% surge in Nvidia’s stock was merely the tip of the iceberg, whereas Dell currently boasts a forward P/E of just under 18 in contrast to Nvidia’s approximately 38. A rudimentary analysis based on this metric suggests considerable upside potential for Dell as traders and investors anticipate fresh business opportunities rather than solely focusing on existing orders.
While I am not suggesting that Dell will mirror Nvidia’s explosive growth over recent years, it is evident that Dell’s momentum shows no signs of waning or reversing course. This positions Dell as an appealing investment due to its momentum on both technical and fundamental fronts, making it a viable contender for investors seeking to capitalize on the AI trend.
