Dell tumbles as AI revenues decline sequentially; Analysts defend

Dell Technologies exceeded EPS expectations in Q3 FY25, reporting adjusted EPS of $2.15, compared to the consensus estimate of $2.06. However, total revenue came in slightly below expectations at $24.37 billion, missing the $24.59 billion forecast. This represented a 9.5% year-over-year increase, driven by strength in the Infrastructure Solutions Group (ISG). While the bottom-line beat provided some optimism, revenue weakness in certain segments, particularly in the Client Solutions Group (CSG), weighed on sentiment.

ISG revenue surged 34% year-over-year to $11.37 billion, surpassing expectations of $11.34 billion. Within this segment, servers and networking revenue soared 58% year-over-year to $7.36 billion, though slightly below the $7.53 billion consensus. Storage revenue also outperformed, rising 4.2% to $4 billion against estimates of $3.83 billion. On the other hand, the CSG segment, which includes PCs and laptops, experienced a 1.2% year-over-year decline to $12.13 billion, with consumer revenue down 18% to $1.99 billion, reflecting ongoing weakness in traditional PC demand.

Dell’s AI-related business continues to show promise, with AI server orders reaching $3.6 billion, up 13% quarter-over-quarter. The AI server order backlog grew 18% to $4.5 billion, and the pipeline expanded by over 50% sequentially. Despite this, AI server revenue declined approximately 6% quarter-over-quarter, and guidance for Q4 indicated a modest sequential decline, disappointing investors. Analysts pointed to delays in NVIDIA's Blackwell GPUs as a contributing factor to the near-term softness. However, Dell's positioning in the AI market remains strong, with expectations for significant revenue ramp-ups in FY26.

Dell provided Q4 guidance for revenue of $24 billion to $25 billion, below the Street's projection of $25.57 billion. EPS guidance of $2.50 also fell short of the $2.64 consensus. These numbers reflect continued challenges in the PC market and delays in AI server sales. Following the earnings report, Dell shares dropped more than 12% in after-hours trading, as investors reacted to the softer-than-expected guidance and lingering concerns about the near-term outlook for key segments.

Despite the weaker Q4 outlook, analysts largely remain constructive on Dell's long-term prospects. Mizuho reiterated an Outperform rating, adjusting its price target to $150 from $155, citing strong AI server order growth and backlog as positive indicators for FY26 and beyond. Evercore ISI maintained its Outperform rating with a $150 price target, while Citi slightly lowered its target to $156 from $160 but reaffirmed its Buy rating. Analysts at Deutsche Bank noted that the near-term headwinds are largely deferrals rather than lost revenue, setting the stage for a stronger FY26.

Dell’s mixed results come amid broader challenges in the tech hardware space. Peers like HP Inc. (HPQ) and HP Enterprise (HPE) also reported declines, reflecting ongoing weakness in PCs and storage demand. However, Dell’s robust AI pipeline and strong positioning in the server market provide a competitive edge. The company’s strategic focus on AI and modular solutions positions it well to capitalize on long-term growth trends, even as near-term challenges persist.

The earnings miss and lowered guidance triggered a sharp sell-off, with Dell’s stock falling 12% in premarket trading to $124.75. This move comes after a strong year-to-date rally, as investors took profits amid concerns about near-term growth. Some analysts, like Morgan Stanley, described the reaction as “overdone” and recommended buying the dip, citing Dell’s strong fundamentals and AI-driven growth potential. The stock faces key technical support levels that traders will monitor closely.

While Q3 results highlighted Dell’s continued strength in AI-related offerings and infrastructure solutions, near-term guidance and ongoing PC weakness weighed on investor sentiment. Analysts remain optimistic about the company’s long-term trajectory, with significant growth potential in AI servers and modular solutions. However, delayed revenue realization and cautious near-term guidance are likely to temper expectations in the coming quarters. Investors will focus on Dell's execution in navigating these headwinds as the company enters FY26.