Dell Technologies Inc. (DELL) latest quarter shows the company continues to benefit from explosive artificial-intelligence demand, with shipments of AI servers more than doubling sequentially to $1.7 billion. However, management expects gross margins to decline roughly 150 basis points in fiscal 2025 due to inflationary input costs, the competitive environment, and a higher mix of AI-optimized servers. This led to an 18% drop in the stock during Thursday’s after-hours session, despite upbeat revenue guidance for the second quarter, snapping a six-day winning streak that saw DELL close at a record high of $179.21 on Wednesday. The stock is up 122% year-to-date and 259% over the last 12 months.
The rapid gains in AI-related stocks are stunning, with bellwether Nvidia up 123.1% YTD and DELL competitor in AI servers, Super Micro Computer
Super Micro Computer
, up 191.3% YTD. While AI technology has the potential to revolutionize various industries, from healthcare and finance to manufacturing and transportation, and lead to the emergence of new business models, the sustainability of these gains is questionable. The stock prices of companies providing AI solutions have surged at an unprecedented pace, driven by investor hype and optimistic growth projections. DELL’s margin pressures could mean that the expected earnings supporting high valuations are at risk.
Investors may consider rotating out of AI stocks in May to capitalize on gains and explore other promising sectors. The well-known adage “Sell in May and go away,” suggesting investors sell stocks in May to avoid a seasonal decline over the summer (though not supported by statistics), may be rejiggered to “Rotate AI in May to get more gains the rest of the way.” But what other sectors or companies look good now?
The energy sector, for example, looks attractive as the International Energy Agency recently raised its oil demand growth outlook for 2024, and crude oil prices have risen more than 35% in the past three years. Companies like Schumberger Ltd (SLB), Baker Hughes
Baker Hughes
(BKR), and ConocoPhilips (COP) are poised for a strong second half. ConocoPhilips recently announced a $17 billion acquisition of Marathon Oil
Marathon Oil
, which will be highly accretive to earnings.
A contrarian pick is Concentric Corp (CNCX), a global provider of customer experience (CX) solutions and technology. The stock is down 37.9% YTD as the market seemed to price in an immediate transition of all call center employees to AI bots. However, the revolution may be a few more quarters or years away, as customers still value human interaction for complex issues.
While the “Sell in May and Go Away” strategy has its merits, investors should consider a more targeted approach by rotating to undervalued companies with strong growth potential. Taking some gains in AI stocks to buy undervalued businesses could yield success. By focusing on companies with solid fundamentals, innovative solutions, and exposure to growing markets, investors can potentially maximize their returns and navigate the challenges posed by the current market environment. Energy stocks like Schumberger Ltd (SLB), Baker Hughes (BKR), and ConocoPhilips (COP) offer compelling investment opportunities for the remainder of 2024 and beyond.
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