Mizuho initiates coverage on Dell, SMCI amid AI boom

Investing.com -- Mizuho Securities in a note dated Monday have initiated coverage on two major players in the AI server market, namely Dell Technologies (NYSE:DELL ) and Super Micro Computer, Inc., (NASDAQ:SMCI ) citing the growing potential of the AI server industry, which is projected to reach $406 billion by 2027.

The analysts project a compound annual growth rate of 54% for AI servers from 2023 to 2027, far outpacing the 7% CAGR of traditional compute servers.

Mizuho has given Dell an “outperform” rating, with a price target of $135, reflecting a 14.3x price-to-earnings (P/E) multiple. 

Dell is well-positioned to capitalize on the rapid growth of AI servers due to its diversified portfolio of PCs, storage solutions, and servers. 

“We estimate C24E DELL AI Server revenues at ~$10-11B (vs 2023E at ~ $800M and compared to SMCI at ~$20B) and ramping up significantly into 2024E,” the analysts said. 

Key to Dell’s advantage is its broad product portfolio and strong customer relationships. The company leads the global server market, holding 13% market share as of 2023. 

Its balanced offering across PCs, storage, and servers allows Dell to leverage AI server growth while maintaining stability in other sectors, such as enterprise storage and PC markets, both of which are projected to grow at 5% and 3% to 4% CAGR, respectively, from 2023 to 2027.

Dell’s strengths are further reinforced by its strong supply chain and strong free cash flow. The company benefits from favorable supplier payment terms and negative working capital, allowing for better cash flow management compared to competitors.

SMCI, a market leader in AI servers with 70-80% market share in 2023, is facing increased competition and internal challenges. 

Mizuho has give the stock a “neutral” rating for SMCI, with a price target of $450, reflecting a 10x P/E multiple. 

While SMCI is a leader in AI server development, its market share is projected to decline to 40-50% by 2024, as competitors like Dell ramp up their AI server offerings.

Despite the company's dominant position in the AI server market, with 70% of its revenues stemming from AI-related products, “It is seeing share loss, margin pressure, negative FCF, and lax internal control issues (10-K delays),” the analysts said. 

Additionally, SMCI's negative free cash flow (FCF), driven by high working capital needs, is a key concern. 

The company has raised $4.8 billion in capital to support its growth, but this has led to increased debt and equity dilution.

SMCI’s high exposure to startups and increasing competition from silicon merchants like Nvidia (NASDAQ:NVDA ) and AMD (NASDAQ:AMD ) also pose risks to its market position.

Source: Investing.com