Dell’s AI Boom Meets Margin Bust — Stock Craters 10%

Dell Technologies reported fiscal second-quarter results on Thursday evening that delivered top- and bottom-line beats, highlighted by record revenue and surging demand for artificial intelligence (AI) servers. Yet despite the strong headline numbers and raised full-year guidance, shares of Dell fell more than 10% in Friday morning trading. The decline reflected investor concerns around the sustainability of AI order momentum, disappointing profit margins in the infrastructure segment, and lighter-than-expected third-quarter EPS guidance. The selloff underscores the market’s current sensitivity to AI growth trajectories and profitability trade-offs across hardware makers.

For the quarter, Dell posted adjusted EPS of $2.32, above consensus estimates of $2.30. Revenue came in at $29.78 billion, also ahead of Wall Street’s $29.17 billion forecast and up 19% year-over-year. That performance marked a record quarter for Dell, with strength concentrated in the Infrastructure Solutions Group (ISG), where servers and networking revenue surged 69% to $12.9 billion thanks to record AI server shipments. Client Solutions Group (CSG), which includes PCs, grew just 1% year-over-year to $12.5 billion, reflecting continued sluggishness in traditional PCs compared to peers like HP. Storage revenue slipped 3% to $3.9 billion, missing expectations, with weakness in North America offset by growth in all-flash offerings such as PowerStore.

While Dell’s revenue exceeded forecasts, profitability metrics raised questions. Gross margin fell to 18.7% versus UBS’s 19.2% estimate, pressured by the heavy mix of AI server shipments. Management acknowledged that while AI hardware sales are “gross dollar accretive,” they are “rate dilutive,” meaning they boost revenue but drag down margins due to competitive pricing and high input costs. ISG operating income rose 14% to $1.5 billion, but operating margin declined to 8.8% of revenue. The margin pressure in ISG was the primary reason investors punished the stock despite the top-line growth.

AI demand was again the centerpiece of Dell’s story, but here too investors grew cautious. Dell booked $5.6 billion in AI server orders during the quarter, down sharply from $12.1 billion in the prior quarter. Management emphasized that shipments were a record $8.2 billion, bringing AI backlog to $11.7 billion, and reiterated its confidence in demand trends. The company raised its fiscal 2026 AI server shipment target to $20 billion from $15 billion just last quarter. However, the sequential decline in orders raised fears that the early surge of AI infrastructure spending could be front-loaded and may moderate as customers work through power, cooling, and data center buildout challenges.

On guidance, Dell raised its full-year revenue outlook to $105–109 billion, up from $101–105 billion, with the midpoint of $107 billion above consensus of $104.6 billion. Full-year adjusted EPS guidance was also lifted to $9.55 at the midpoint versus Wall Street’s $9.38 expectation. Yet the company’s third-quarter EPS guide of $2.45 fell short of estimates at $2.55, offsetting a stronger revenue outlook of $26.5–27.5 billion versus $26.1 billion expected. Management attributed the profit shortfall to seasonality, particularly in storage, with a larger portion of earnings expected to flow through in Q4. Analysts flagged this as a disappointment, suggesting visibility into near-term profitability remains limited.

Conference call commentary focused heavily on AI. COO Jeff Clarke highlighted Dell’s ability to ship NVIDIA GB200 and GB300 Blackwell systems to customers like CoreWeave, positioning Dell as one of the fastest-to-market integrators of cutting-edge GPUs. Clarke described the AI order pipeline as “multiples of backlog,” with broad-based demand across financial services, healthcare, and manufacturing. CFO Yvonne McGill added that AI margin rates should improve in the second half of the year as value engineering, scaling, and a stronger enterprise customer mix kick in. Still, management acknowledged that Q2 AI deals were “very competitive” and supply chain adjustments weighed on profitability.

Analysts pressed management on three key areas during Q&A. First, Wells Fargo asked whether Dell had the flexibility to exceed its $20 billion AI target, given the sequential slowdown in orders. Clarke responded that the pipeline remained robust and that the company had ample manufacturing capacity to deliver more if customers’ buildout timelines accelerated. Second, Bank of America questioned how margins would step up in Q4, given the implied improvement. McGill pointed to storage seasonality, a recovery in traditional servers, and lower operating expenses as key drivers. Third, Morgan Stanley pressed on storage demand, where Dell saw softness in large accounts. Clarke emphasized double-digit growth in PowerStore and all-flash offerings, but admitted that hyperconverged infrastructure customers were reassessing private cloud strategies, weighing on results.

Investor reaction reflected both the optimism and the risks in Dell’s AI narrative. Bulls highlighted the raised long-term AI revenue target and Dell’s position as a key NVIDIA partner, with analysts at BAML and Mizuho raising price targets to as high as $167. But bears focused on margin dilution, weaker sequential AI orders, and near-term EPS guide softness. Fox Advisors downgraded the stock to Equal Weight from Outperform, while others, including UBS and Wells Fargo, reiterated Buy ratings but acknowledged the volatility.

Beyond AI, Dell’s PC and storage businesses remain sluggish, underscoring its reliance on AI infrastructure to drive growth. Commercial PCs rose 2% while consumer PCs declined 7%, though profitability improved thanks to better execution and product positioning. Storage declined 3% despite strength in PowerStore, reflecting ongoing demand headwinds in North America. Dell emphasized the Windows 10 refresh cycle as a potential tailwind for PCs in the coming quarters, but for now, growth remains muted.

In sum, Dell’s quarter reinforced the bifurcation in its business model: AI servers are driving revenue growth and positioning Dell as a leader in next-gen infrastructure, but at the cost of margins and near-term EPS visibility. The sequential decline in AI orders rattled investors, even as management projected a doubling of AI shipments by 2026. With the stock down sharply, bulls see an opportunity to buy into long-term AI growth at a cheaper valuation, while skeptics warn that profitability pressures and lumpy demand could weigh on results for several more quarters. The debate will likely continue into Dell’s October analyst day, where management will face pressure to prove that its AI momentum is sustainable and margin accretive over time.