Morgan Stanley in a deep dive with Dell Technologies, Inc. Class C (DELL.US) COO on "This time is different": AI agents are not just another refresh cycle, but a TAM expansion, with the probability of a $756 bull case rising.

Morgan Stanley released a research report stating that after a one-on-one meeting with Chief Operating Officer Jeff Clarke at Dell Technologies, Inc. Class C headquarters, the bank gained a deeper understanding of the bullish thesis for Dell Technologies, Inc. Class C, but still maintained a "Neutral" rating and a $511 price target. The core debate in the report is whether AI agents represent yet another peak in the hardware cycle or a multi-year structural boom in on-premise infrastructure. Morgan Stanley explicitly stated that the meeting prompted it to reassess its previously bearish-leaning view and that it sees a higher probability of the $756 bull case materializing over the next 12 months. This Time Is Different: From Refresh Cycle to TAM Expansion Clarke emphasized to Morgan Stanley that over the past 40-plus years, the hardware market has experienced 8 boom-and-bust cycles, but these cycles were primarily driven by refresh rate fluctuations from changes in per-capita device penetration, rather than structural expansion of the total addressable market (TAM). For example, during the pandemic, the PC refresh cycle accelerated due to a rise in the PC-to-person ratio, but after society reopened, the ratio normalized, and the PC TAM was no larger than pre-pandemic. What makes AI agents different is that for the first time, they decouple cognitive output from headcount, enabling enterprises to accomplish more work without adding staff, with productivity gains reaching 10x or even 100x. Dell Technologies, Inc. Class C believes this return is clearly visible, and all types of enterprises will pursue this path. By 2030, inference tokens are projected to grow 87x, adding 200 gigawatts of compute, with ZettaFLOPS growing to 830. Since agents require 1 billion more tokens per unit of work than basic chat Siasun Robot&Automation, token growth will force data centers to restructure toward accelerated computing and higher CPU:GPU ratios, catalyzing a structural rise in compute and storage demand. Dell Technologies, Inc. Class C also believes that AI agents will be deployed in a hybrid model. Enterprises will dynamically allocate inference workloads between public cloud and on-premise facilities based on security and cost trade-offs. Dell Technologies, Inc. Class C itself will place content-related workloads in the public cloud, but will never move proprietary source code or telemetry data off Dell Technologies, Inc. Class C premises. Considering inference tokens are projected to grow 87x by 2030, "even taking a small slice of a very large pool will result in a very large number." The proliferation of open-source weight models will also drive enterprises to increase on-premise infrastructure investment to optimize costs. Servers and Storage: Density Gains and Supply Bottlenecks Coexist Traditional server shipments are still declining year-over-year, but Dell Technologies, Inc. Class C believes this is not demand weakness, but rather that servers are becoming more powerful, denser, and more efficient. 17th/18th generation Dell Technologies, Inc. Class C servers can replace up to 13 14th generation traditional servers. In the near term, server unit volumes decline but ASPs rise; as data centers are rebuilt around accelerated computing and agent proliferation drives CPU server demand, denser server units will eventually return to growth. Clarke even noted that if inference tokens truly grow 87x in 5 years as expected, traditional server unit growth could also become exponential. Storage benefits similarly, with KV Cache and agent artifact retention behaviors driving greater data storage and knowledge retention demand. Supply is the biggest challenge facing Dell Technologies, Inc. Class C. Clarke stated that historical commodity cycles typically last 2 to 4 quarters, driven by mature hardware replacement cycles or boom/bust supply decisions; but if you believe the gigawatt and token growth algorithms, memory, HDDs, etc. are not short-term cycles, and shortages could persist for another five years. When asked what keeps him up at night, Clarke's answer was not macro, GEO Group Inc conflicts, data center overbuilding, or power shortages, but supply. He described the current environment as "we're in Neverland," with Dell Technologies, Inc. Class C assuming key component supply will be chronically short. Margin Controversy: Not Simply "Profit Stacking" Morgan Stanley previously noted in an industry report that Dell Technologies, Inc. Class C and Hewlett Packard Enterprise Co. technology (HPE.US) infrastructure gross margins experienced unprecedented expansion, primarily attributing it to "profit stacking," i.e., leveraging memory cost increases to capture higher profits amid inelastic demand. Clarke acknowledged that year-over-year server and storage margins are expanding, but offered a different perspective: in a world of limited bit supply, enterprises will allocate constrained components to the highest-margin products; meanwhile, structural TAM growth in infrastructure reduces the willingness to compete on pricing for incremental customers. When TAM is growing, rather than selling servers at narrow margins to acquire new customers, it is better to maintain stricter pricing discipline and raise the price floor. Clarke believes the resulting server and storage margin improvement is structural. On the operating expense side, Dell Technologies, Inc. Class C's internal AI modernization is in full swing. Clarke emphasized that Dell Technologies, Inc. Class C is leveraging AI across supply chain optimization, customer service, coding, sales, and R&D to boost productivity and efficiency. These investments will not slow in the near term because Dell Technologies, Inc. Class C is reaping "enormous benefits," making a year-over-year decline in operating expenses unlikely. However, as revenue grows faster than investment, Dell Technologies, Inc. Class C will still unlock operating expense leverage. Valuation Divergence: Bulls and Bears Face Off on Durability Morgan Stanley noted that investor conversations show both bulls and bears agree that Dell Technologies, Inc. Class C's revenue and earnings growth over the next 18 months will be extremely strong. Buy-side expectations for FY2028 EPS have risen to the $40-$50 range, versus Morgan Stanley's estimate of $36.47 and consensus of $30.44. The real disagreement is about the durability of growth: bulls embrace Clarke's worldview and are willing to assign 15x P/E on FY2028 EPS, corresponding to a $600-$750 stock price; bears see this as another boom/bust cycle, with AI value accruing more to the cloud, and when inelastic demand turns into demand collapse, Dell Technologies, Inc. Class C earnings could halve, so they are only willing to assign 8-10x P/E on FY2028 peak EPS, corresponding to a $320-$500 stock price. Morgan Stanley candidly admitted that it previously leaned closer to the bear view, but Clarke's meeting prompted the bank to reassess, with the key question not being token growth itself, but whether that growth will truly bring a long-term on-premise infrastructure boom. Currently, the bank still maintains a "Neutral" rating and $511 price target, but sees a higher probability of the $756 bull case materializing over the next 12 months. Its bull case is $756, based on 18x FY2028 bull-case EPS of $42; base case is $511, based on 14x FY2028 EPS of $36.47; bear case is $306, based on 12x FY2028 bear-case EPS of $25.53. On the financial model side, Morgan Stanley projects Dell Technologies, Inc. Class C FY2027 revenue growth of 93.9%, FY2028 growth of 33.1%, and a -4.7% decline in FY2029; non-GAAP gross margin declining from 20.4% in FY2026 to 16.0% in FY2028, and 16.2% in FY2029; operating margin rising from 8.8% to 11.1% in FY2027, then falling back to 10.0% and 10.2%; free cash flow rising from $8.552 billion to $21.174 billion and $28.876 billion, and $27.910 billion in FY2029. The bank's FY2028 revenue forecast is $293 billion, above consensus of $230.4 billion; EPS forecast of $36.47, above consensus of $30.02; net income forecast of $22.813 billion, above consensus of $19.269 billion.