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Dell Shares Plummet as AI Server Sales Fall Short of Expectations

Dell Technologies Inc. (DELL) saw its shares drop by 22% on Friday, marking the steepest decline in four years. 

This downturn followed the release of the company's first revenue increase since 2022, which failed to meet the lofty expectations set by investors for its artificial intelligence (AI) server business.

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Revenue and Profit Performance
In the period ending May 3, Dell reported a 6.3% increase in sales to $22.2 billion, surpassing the average analyst estimate of $21.6 billion. Profit, excluding some items, was $1.27 per share, slightly above the projected $1.23. Despite these positive figures, the market reaction was overwhelmingly negative.

AI Server Sales and Market Reaction
Revenue from Dell’s AI-optimized servers more than doubled from the previous quarter to $1.7 billion. The backlog for these high-powered machines grew by over 30% to $3.8 billion. However, the excitement surrounding AI demand had set very high expectations. As a result, Dell's shares plummeted as much as 22% in early trading on Friday.

Toni Sacconaghi, an analyst at Sanford Bernstein, noted that the results were disappointing relative to the high expectations. He highlighted concerns about the profitability of AI servers, pointing to a decrease in adjusted operating margin.

Future Outlook and Market Sentiment
Despite the disappointing quarter, Dell expects continued momentum from AI demand throughout the year. The company raised its revenue outlook for the fiscal year ending February 2025 to a range of $93.5 billion to $97.5 billion, an 8% increase at the midpoint, exceeding analysts’ average estimate of a 7% gain. However, the outlook suggests relatively flat AI server sales for the remainder of the year, raising doubts about near-term competitiveness.

For its personal computer (PC) segment, Dell reported $12 billion in revenue, roughly unchanged from the same period last year. Business PC sales grew by 3% to $10.2 billion, outperforming analyst expectations of a 2% decline. This follows a historic decline in the PC market, which saw its first increase in shipments since the end of 2021.

Margin Concerns
Margins were a significant issue for Dell in the latest quarter. Non-GAAP gross margin fell to 22.2% from 24.7% a year ago, while the operating margin declined to 6.6% from 7.6%. The competitive pricing environment and a higher mix of AI-optimized servers contributed to this margin compression.

Despite these challenges, Dell remains optimistic about the upcoming PC refresh cycle, driven by aging PC installations, the approaching end-of-life for Windows 10, and advancements in AI-enabled architectures.

Collaboration with Nvidia
Dell’s relationship with Nvidia Corp. (NVDA) and Dell Technologies Inc.  plays a crucial role in its AI strategy. Dell's Chief Operating Officer Jeff Clarke highlighted the strong demand for AI-powered servers, particularly those using Nvidia’s chips. This partnership has been a key factor in Dell’s recent AI-driven growth.

Nvidia shares, however, were down 2.2% on Friday. This dip followed Dell's earnings report and broader concerns about technology stocks. Nvidia’s stock had surged 123% this year, significantly outpacing the broader market.

Dell’s recent earnings report reflects both the promise and pitfalls of its AI server business. While the company has achieved significant growth in this area, the high expectations and margin pressures present ongoing challenges. Investors will be closely watching how Dell navigates these dynamics in the coming quarters.

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