Dell Stock Drops 10% as AI Server Margins Shrink

Dell Technologies Inc. (DELL.US) experienced a significant decline in its stock price on Friday, dropping nearly 10% to close at $121.06. This sharp drop was primarily due to concerns over the narrowing profit margins of its AI server business during the second quarter. Despite reporting a 19% increase in revenue to $29.8 billion, surpassing the average analyst expectation of $29.2 billion, the company's adjusted earnings per share of $2.32, while slightly above the $2.30 expected by analysts, failed to alleviate investor worries.

The company's financial report revealed that the sales volume of AI servers decreased compared to the previous quarter. Additionally, the profit margins for these high-performance machines were lower than anticipated by analysts. For the second quarter ending August 1, Dell recorded $5.6 billion in AI server orders, a significant drop from the $12.1 billion in the previous quarter. The company shipped $8.2 billion worth of servers during the quarter, with an order backlog valued at $11.7 billion at the end of the period.

In a statement released on Thursday, Dell disclosed that the operating profit margin for its infrastructure segment, which includes server and network sales, was 8.8% for the quarter. This figure fell short of the average analyst expectation of 10.3%. Dell's overall adjusted gross margin for the quarter was 18.7%, a contraction from the previous year and below the analyst expectation of 19.6%.

The narrowing profit margins in the AI server segment have raised concerns among investors about the company's ability to maintain profitability in a competitive market. The decline in AI server orders and the lower-than-expected profit margins suggest that Dell may be facing challenges in this high-growth sector. The company's infrastructure segment, which includes servers and networking equipment, is a critical component of its business, and any issues in this area can have a significant impact on overall performance.

Dell's management has acknowledged the challenges in the AI server market and has indicated that the company is taking steps to address these issues. However, the market's reaction to the earnings report suggests that investors remain cautious about the company's prospects in this area. The decline in Dell's stock price reflects the market's concerns about the company's ability to navigate the competitive landscape and maintain profitability in the AI server segment.