Rapid hardware and software innovation are working to shift the world from a PC-centric focus to servers, smart phones and a stunning number of related technology devices. However, the demise of the computer is greatly exaggerated, and though growth isn’t as robust at it used to be, recent trends are very encouraging.

Global economic woes have masked a long-awaited PC and data center replacement cycle from businesses. Employees need computers to do their jobs and employers need technology to keep productivity moving forward. One industry leader is taking advantage of this refresh cycle and using its flagship computer segment as a cash cow to evolve along with the industry.

Dell’s (Nasdaq: DELL) is known for a lean computer manufacturing model that has created a legion of wealthy “Dell-ionaires” in Austin, TX and fantastic total returns for shareholders. But it has fallen out of fashion with the market over concerns that its made-to-order computer franchise is being steadily eroded by a maturing computer industry, nimble competitors such as Acer, Hewlett-Packard (NYSE: HPQ) and Lenovo, as well as a shift to newer hardware.

It sounds grim, but Dell’s stock has fallen to a level that discounts a doomsday scenario to its future operations. Savvy investors should look to profit from this overly negative prognosis, as the facts simply don’t support it. Dell saw an impressive jump in sales during its most recent quarter: total sales increased +22% from last year’s second quarter, as product revenue increased a very healthy +19% to $12.6 billion.

This coupled with a global economic downturn has created quite a bit of uncertainty regarding its future direction. This lack of visibility became evident several years ago and was only exacerbated by the financial crisis. The proof is in the stock chart: the shares have trended downward from more than $40 a share back in 2004, and tumbled from over $20 a share in June 2008, to about $12.50 today.

But Dell is well aware of its situation. The company is aggressively seeking acquisitions to help it evolve. It has acquired Perot Systems to add lucrative service revenue and most recently was chasing 3PAR (NYSE: PAR) to gain further exposure to the fast-growing market for data storage. And while the 3PAR deal appears to have fallen through as HP has outbid Dell, the move demonstrates that Dell is not out to diversify its business mix at any cost, though it surely hates to lose out to a rival.

Strong second quarter results were primarily attributed to the PC recovery , as core laptop and desktop sales improved a robust +21% and +17%, respectively . Server and networking products saw an increase of +35%. Service revenue jumped +57%, which was nice but due mostly to the acquisition of Perot Systems. Software and sales of ancillary products such as digital cameras, keyboards and televisions grew a modest +6%.

The prognosis is clear: Dell’s future will see a shift away from PCs. Server, storage and services represented 28% of total sales during the most recent quarter, and that total should rise as the company evolves. Dell is also de-emphasizing individual consumers, who accounted for only 18% of sales. Large businesses and public institutions drove almost 60% of sales, with small and medium businesses driving the rest.

Even with the steady shift in focus, the business as it stands is impressively profitable. The capital generation is evident in Dell’s free cash flow generation, which came in at about $1.80 per diluted share during the most recent full year. The company should conservatively report well over $1 per share in free cash flow during the current fiscal year.

Dell’s computer profits leave billions of dollars in excess of capital each year to buy back shares and acquire competitors. Annual cash production combined with a war chest of more than $8 billion in net cash means available and increasing dry powder to supplement organic growth.

Action to Take —> Dell is currently unloved in the industry but is seeing a healthy recovery in demand for its computers. Despite some erosion, this flagship business segment still boasts a competitive advantage and provides the cash to make acquisitions in faster-growing technology markets. The bar is set extremely low on its business prospects, meaning that even a minimal amount of success in the evolution of its business model could lead to big gains for shareholders.

Dell’s extremely low trailing cash flow multiple and moderate forward multiple (about 8.5 times expected earnings) discounts extremely low cash flow growth (below +2% annually) during the next five years. I think Dell can grow in the mid to high single digits during this timeframe, which would make the shares between -25% and -50% undervalued from current levels and in my estimation contains conservative overall assumptions. That means the shares have the potential to double within a couple of years.