In brief
- Margin and AI server backlog fears sent Dell shares down Friday.
- On Thursday, the business outperformed analysts’ estimates and gave optimistic guidance, but Wall Street wasn’t satisfied.
- Dell sells AI servers at “near-zero margins,” analysts said.
Dell Technologies saw a significant drop in its stock price on Friday, with shares closing down nearly 18%. Investor dissatisfaction over the company’s lower-than-expected artificial intelligence server backlog and an anticipated decline in profit margins were the driving forces behind this decline.
Dell’s fiscal first-quarter results, announced on Thursday, exceeded analysts’ expectations and provided optimistic guidance. The company reported revenue of $22.24 billion for the period, surpassing the estimated $21.64 billion by analysts from LSEG.
Dell has projected earnings of $1.65 per share for its second quarter, with sales anticipated to range between $23.5 billion and $24.5 billion. According to analysts surveyed by FactSet, the anticipated amount was $23.35 billion. DELL provided sales guidance of $93.5 billion to $97.5 billion for the entire fiscal year.
Despite the positive results, investors remained unsatisfied, leading to a decline in shares during after-hours trading on Thursday.
Bernstein analysts expressed their concern over Dell’s results, specifically noting the decrease in operating margins for its Infrastructure Solutions Group compared to the previous year. In spite of generating approximately $1.7 billion in additional AI server revenues, the company’s operating profits remained unchanged compared to the previous year.
The analysts expressed renewed concerns regarding the profitability of Dell’s AI servers, suggesting that they may be sold at extremely low margins. Put simply, the company’s AI initiatives have yet to generate any profits.
“Overall, compared to the high expectations, Dell’s Q1 25 results were seen as disappointing,” the analysts noted in a Friday report.
Bank of America analysts expressed their positive outlook on Dell’s recent performance, reaffirming their recommendation to buy the stock. Nevertheless, it was noted that the after-hours shift was partially influenced by Dell’s AI server backlog of $3.8 billion, which fell short of expectations. Additionally, there are concerns about the company’s projected decline in growth margin for the fiscal year.
According to analysts, there is a strong belief in the potential of AI adoption, particularly in the field of AI servers. They anticipate that Dell will be able to achieve higher AI margins as the company continues to build a robust pipeline and maintain momentum in this area. As a result, they reiterated their recommendation to buy.
JPMorgan analysts expressed their lack of surprise regarding the investor reaction to the report while also stating their belief that the concerns are exaggerated. The analysts reiterated their positive outlook on the stock, highlighting Dell’s fluctuating margins as a potential opportunity for investors.
The analysts expressed optimism about the company’s future growth, anticipating an increase in both revenue and earnings beyond its medium-term goal. They also predicted a rise in demand for AI technology and a rebound in the company’s traditional infrastructure.
According to a note written on Thursday, it is anticipated that investors may feel let down due to high expectations of a significant increase in profits. As a result, it is likely that investors will closely watch the company’s performance to see if they deliver on their promise of improving margins for the rest of the year.
Source: CNBC News
