Shares of Dell fall 16% as AI servers are sold at ‘near-zero margins’

Dell Technologies’ shares dropped by almost 16% on Friday due to a lower-than-anticipated AI server backlog and predicted margin decrease.

Dell released fiscal first-quarter results on Thursday that exceeded analysts’ forecasts and provided positive guidance. The company reported revenue of $22.24 billion for the period, up from analysts’ estimates of $21.64 billion, according to LSEG.

Dell predicts earnings of $1.65 per share in the second quarter, with sales ranging from $23.5 billion to $24.5 billion. FactSet polled analysts, who expected $23.35 billion. Dell projected sales of $93.5 billion to $97.5 billion for the whole fiscal year.

The beat was insufficient to placate investors, and shares fell in extended trading Thursday.

According to Bernstein analysts, the “principle disappointment” in Dell’s results was a year-over-year contraction in operating margins for its Infrastructure Solutions Group. Furthermore, operating earnings remained flat compared to the same quarter last year, despite the company’s $1.7 billion in additional AI server revenues.

The analysts expressed concern that Dell’s AI servers are being marketed at “near-zero margins.” In other words, the company’s AI activities are not yet generating revenues.

“On net, relative to very high expectations, Dell’s Q1 25 results were disappointing,” the analysts wrote in a note Friday.

Bank of America analysts said Dell had a great quarter and reiterated their buy rating on the stock. However, they stated that the after-hours move was due in part to Dell’s $3.8 billion AI server backlog, which was smaller than projected, and that the company’s growth margin is expected to drop this fiscal year.

“We reiterate Buy given that we are still in the early stages of AI adoption with continued strong pipeline and momentum around AI servers, where we think DELL will be able to capture higher AI margins over time,” the analysts wrote in a note issued on Thursday.

Analysts at J.P. Morgan said the investor reaction to the article did not surprise them, but they believe the fears are “overblown.” They maintained their overweight recommendation on the stock, saying Dell’s margin volatility will present an appealing buying opportunity.

According to the analysts, the firm is on track to exceed its medium-term revenue and earnings targets, and they anticipate that Dell will see accelerated AI demand patterns as well as a recovery in its traditional infrastructure.

“We expect investors to be disappointed given lofty expectations of a ramp with greater flow-through to the bottom-line, and we would expect an overhang with investors more likely to monitor execution to the promised margin improvement through the remainder of the year,” they stated in a note issued on Thursday.

— CNBC’s Michael Bloom and Kif Leswing contributed to this story.