Dell Stock Analysis: Is It Still Undervalued and the Best AI Infrastructure Play by 2026?

Dell’s Infrastructure Solutions Group (ISG) remains the workhorse of its AI push, with AI-optimized servers as the fastest-growing product line for the company. AI server sales are estimated internally by the industry to have risen some 164% year over year to around $24.7 billion in fiscal 2026 and may reach $50 billion by fiscal 2027 as demand spills over onto the NVIDIA (NVDA) Blackwell/Vera Rubin cycle. The growth is solid, but the margin profile is not yet the best because GPUs dominate bill of materials. Dell’s AI server operating profit margin has increased into low double digits, still significantly below ISG’s near 14.8% margin. Nonetheless, ISG margin and revenue have both expanded the past year, with AI accounting for an ever-larger portion of those gains, suggesting that operating leverage, services attach, and improved supply execution are offsetting diminishing unit economics. Should that trend continue, it bodes well for both a more robust earnings power and a stronger multiple for Dell stock.

Traditional x86 servers are now revitalizing in a cyclical and structural manner as enterprises modernize their estates for AI workflows and bring more work to inference. Management recently referenced a renewed momentum in x86-based AI workloads along with mention of increasing "AI-forward" usage in SaaS-based software development, scientific computing and finance. That is consistent with commentary from Advanced Micro Devices (AMD), which sees double-digit growth in server CPUs this year. Dell is also benefiting from a large installed base upgrade as customers are moving up from 14th-gen platforms to 16th and 17th-gen platforms where average selling prices are higher, but total cost of ownership plummets significantly. There’s about a 7:1 cost consolidation between these two upgrades, according to management, which is a win-win for the customers and Dell’s margins. Locally, as inference ramps on-prem, local compute density, security and predictable latency support refreshed, CPU-centric architectures with accelerators. What is not appreciated—the higher-margin traditional servers can at least partially offset mix pressure from AI-optimized systems and that is what matters in the Dell stock price debate.

Storage is leaping back to the forefront as agentic AI extends continuous reasoning loops that create and reconsume huge context. In these workflows, near-memory data is less than part of the solution; high-throughput, low-latency shared storage is required to keep up with running huge numbers of inference lines. Dell’s portfolio makes the company well-positioned for this. In the most recently reported quarter, the storage business saw a gain of around 2% year over year, led by double-digit growth in IP-led platforms, including PowerMax, PowerStore, PowerScale, ObjectScale, and Data Protection. PowerStore, in particular, posted double-digit growth with half of new customers adopting it and nearly 30% of those are net-new to Dell Storage—an indication of share gains tied to AI use cases.

The forthcoming Lightning File System (Lightning FS) is targeted precisely at AI inference bottlenecks, and Dell is claiming throughput approximately twice that of other parallel file systems. Combined with best-in-class 5:1 data reduction in PowerStore and up to 75:1 compression and dedupe in Data Protection, the IP from Dell can extend the potential capacity as costs of memory rise and context windows enlarge. This shift in mix towards more higher-margin IP business should also help the margin, as AI implementations mature, and it is a part of the business that is underappreciated in most of the narratives around Dell stock.

Although the PC industry was still soft in the latter part of the year, Dell booked its strongest fiscal year ever, bringing in 113 billion dollars in revenue, a 19% increase, with an adjusted EPS that grew by approximately 27%. The company has more than $64 billion in AI orders over the past year, and entered the year with a backlog of nearly $43 billion, indicating strong demand from hyperscalers and large enterprises.

For the outlook, a base case points to fiscal 2027 revenue of $140.6 billion, a 24% rise on a YoY basis, and five-year compound growth rates from fiscal 2026 to fiscal 2031 are anticipated to be in the low-teens and ISG in the high-teens fueled by AI servers, classical compute, networking and storage. The key point is that high-margin storage and traditional servers can provide earnings stability even if AI-optimized servers are the fastest-growing.

That said, Dell shares currently trade at about a low-teens forward P/E in that environment. That pricing reflects macro caution and mix visibility, not finances.

The anticipated management sales growth of 7% to 9% over the long term appears to be on the modest side given the company’s positioning in the AI infrastructure. Capital returns, including a path for dividend growth through fiscal 2030, suggest confidence in cash flow stability. And so we really have the product roadmap more and more focused on high-volume inference where customers are anticipating more on-prem deployments. Management has stated that around 85% of enterprises will bring GenAI on-prem in the next 24 months, which suits Dell’s full-stack model spanning servers, networking, storage and services. So if that enterprise rotation actually comes to pass, FY 2026 and 2027 could be better than consensus currently.

The most near-term risk is margin compression with a product mix skewed to GPU-heavy systems where the cost of components—particularly HBM and DRAM—remains high. Increased memory prices are also a burden for the Client Solutions Group, as the wider PC industry is now enduring some soft patches in consumer demand and price consciousness. Competition is becoming more fierce as Hewlett Packard Enterprise (HPE), Super Micro Computer (SMCI) and chip makers add full-rack solutions; with systems from NVIDIA, AMD will offer its Helios platform, and Hon Hai Precision Industry (HNHAF/HNHPF) among other manufacturing-led providers are going up the stack. Price competition might erode the already-thin AI server margins. So any slowing storage growth or delays in Lightning FS adoption would also strain the margin-up narrative. And if hyperscale capex growth falls short of expectations or the enterprise on-prem timeline slips, the potential inflection in revenue and cash flow could be pushed out, delaying any re-rating in the shares of Dell.

What "best" looks like depends on investors' time horizons and risk tolerance. It seems reasonable to expect this to turn into either another dual-use innovator or just another traditional data center hardware company in 2026, but with this initial go-round, Dell at least has one very solid contender for the most compelling risk-adjusted 2026 titleholder. The company is best positioned in the fastest-growing AI subcategory but also has profit enablers in legacy servers and storage that many models still underestimate. Execution is solid and consistent, backlog is very large, and on-prem inference is increasingly preferred by enterprise customers (where Dell’s full stack has a huge advantage) over cloud. A conservative market—with concern over the mix and margins deterioration—was holding multiples down and leaving room for the Dell stock price to recover in the event ISG margins improved and storage/IP contributions grew according to plan.

Investors would be looking for these releases to confirm that: the AI server mix isn’t margin dilutive to consolidated margin; that storage is continuing to be built out with IP-led platforms and Lightning FS milestones; and that CSG pricing/inventory are stabilizing amidst rising memory. If these boxes are checked then velocity is going to get a lot bigger. Overall, Dell looks to be well-positioned to give its nearest infrastructure stock rival a strong run for best AI infrastructure stock 2026, and its current valuation leaves more upside if execution continues to track well.