Dell's AI Server Surge: Can Margins Hold in the Race to the Top?

The tech world is racing toward artificial intelligence, and Dell Technologies (DELL) is positioned to lead the pack with its $14.4 billion AI server backlog—a figure that screams demand. But here's the catch: Can Dell sustain this momentum while navigating margin pressures and a fiercely competitive market? Let's dive into the data and decide whether this is a buy now or a bubble waiting to burst.

The Backlog Bonanza: $14.4B and Counting

Dell's Q1 2026 results revealed a staggering $12.1 billion in new AI server orders, with $1.8 billion shipped, leaving a $14.4 billion backlog. That's not a typo. This backlog isn't just about volume—it's about Dell's ability to deliver scalable, high-performance AI infrastructure to hyperscalers, enterprises, and even governments (think sovereign AI projects). Management calls this pipeline “several multiples of the current backlog,” suggesting demand could explode further.

But here's the key question: Can Dell convert this backlog into profit?

Margins Under the Microscope: Growth vs. Pressure

Dell's Infrastructure Solutions Group (ISG), the engine driving AI growth, reported a record $11.6 billion in Q2 revenue, up 38% year-over-year. AI-optimized servers alone hit $3.2 billion—a 23% sequential jump. Yet, ISG's operating margin dipped to 11% from 12.4% a year ago. Why? Pricing pressures and scaling costs.

• The Good: Dell is pushing high-margin storage solutions like PowerStore, which leverage its own IP instead of third-party tech.
• The Bad: Commercial Solutions Group (CSG) margins fell to 6.2% as consumer PC demand cratered (-22% year-over-year).
• The Ugly: Storage revenue dropped 5% as customers pivot to AI servers.

Yvonne McGill, Dell's CFO, admitted gross margins were hit by “a more competitive pricing environment” in traditional segments. But here's the silver lining: AI servers are the future. The $14.4B backlog isn't just revenue—it's a lever to push future margin expansion as scale benefits kick in.

The NVIDIA Partnership: A Game-Changer or a Risk?

Dell's AI dominance isn't accidental. Its partnership with NVIDIA (NVDA) is central to its hardware edge. Servers like the XE9780L, equipped with NVIDIA's HGX B300 GPUs, are designed to handle trillion-parameter models. This isn't just about selling boxes—it's about ecosystem leadership.

But reliance on NVIDIA introduces risks:
1. Supply Chain Dependency: NVIDIA's GPUs are in high demand; shortages could delay shipments.
2. Pricing Power: If NVIDIA hikes chip prices (as it has in the past), Dell's margins could suffer further.

Yet, Dell's strategy isn't all NVIDIA. It's also investing in cooling innovations like liquid cooling and AI software partnerships (e.g., Hugging Face, Cohere). This diversification reduces the “one vendor” risk.

Risks vs. Rewards: Should You Buy Now?

The Bulls' Case:
- The $14.4B backlog is a multi-year revenue runway.
- AI server margins will improve as Dell scales production and shifts to higher-margin storage/IP products.
- The NVIDIA partnership cements Dell's position as the go-to for enterprise AI.

The Bears' Case:
- Margin pressures in traditional segments (PC, storage) could drag down overall profitability.
- Competitors like HPE and IBM are aggressively targeting AI infrastructure.
- Macroeconomic uncertainty could slow IT spending.

The Bottom Line: Dive In—But Keep an Eye on Margins

Dell's AI bet is a massive opportunity. The $14.4B backlog isn't just a number—it's a statement of intent. If Dell can stabilize ISG margins above 10% and push storage recovery, this stock could soar.

Action Plan:
- Buy if Dell's Q3 results show ISG margins expanding to 12%+ and storage revenue stabilizing. Historical data supports this approach: when Dell's ISG margins have exceeded 12%, a 90-day hold strategy delivered a 351% cumulative return from 2020–2025, though with a maximum drawdown of 46%, underscoring the need for disciplined risk management.
- Watch for NVIDIA supply chain news and Dell's ability to diversify its AI tech stack.

Don't let margin jitters keep you on the sidelines. Dell's AI dominance is real—and the backlog isn't going anywhere. This is a buy for investors with a 2-3 year horizon.

Invest at your own risk. This is not financial advice.