Break the skepticism! Wall Street: Dell's (DELL.US) strong Q3 results add evidence to AI profitability

After-hours on Thursday, Dell (DELL.US) reported better-than-expected Q2 results, which Wall Street analysts said helped to alleviate investors' concerns that AI can actually improve the margins of companies other than Nvidia (NVDA.US). As of writing, the stock rose about 5% before the market opened on Friday.

Dell's Infrastructure Solutions Group (ISG) achieved revenue of $11.65 billion in Q2, up 38% YoY, with an EBIT margin of 11%, up 350 bps QoQ. This includes an 80% YoY growth in server and networking revenue to $7.67 billion, topping the market's expectation of $5.96 billion.

Evercore ISI analyst Amit Daryanani published a research note saying the results were impressive.

Daryanani wrote in an investor note: "Given the overhang on Dell's ISG segment and AI margins, we think this performance is quite impressive and should help alleviate investor concerns on margin issues." The analyst rates Dell "Outperform" with a target price of $140.

Moreover, Dell said its server revenue in Q2 was $3.1 billion, up 82% QoQ, and its backlog orders currently stand at $3.8 billion, while its orders to be delivered are several times its backlog.

Looking ahead to the rest of the fiscal 2025, Dell said it expects revenue to be between $95.5 billion and $98.5 billion, with a midpoint of $96 billion slightly below the market's expectation of $96.37 billion. The company added that its ISG segment's revenue is expected to grow about 30%, mainly due to AI and traditional servers.

Analyst Asiya Merchant of Citigroup also agreed, citing the continued momentum of AI.

Merchant wrote in an investor note: "The beat was driven by growth from AI servers (up 82% QoQ) and better-than-expected ISG margins as Dell was able to provide higher services to improve its enterprise customer mix." Merchant reiterates a "Buy" rating and raises the target price to $160 from $150.

Analyst Aaron Rakers of Wells Fargo also reiterates his "Overweight" rating, saying the results "significantly" alleviate concerns about AI margins.

Rakers wrote in a report: "Dell's impressive capital return capabilities remain a key tenet of our thesis."