Dell Technologies is seeing higher revenue from AI server sales but it's not leading to a corresponding increase in profits. Dell stock tanked on Friday after its fiscal first-quarter earnings report.
Late Thursday, Dell reported in-line earnings on better-than-expected sales for its fiscal Q1. But it disappointed with its earnings outlook for the current quarter and the full year.
The computer maker earned an adjusted $1.27 a share, down 3% year over year, on sales of $22.24 billion, up 6%, in the quarter ended May 3. Dell credited record AI-optimized server sales for its revenue beat.
For the current quarter, Dell predicted adjusted earnings of $1.65 a share, down 5% year over year, on sales of $24 billion, up 5%. Analysts were looking for earnings of $1.88 a share on sales of $23.35 billion in the fiscal second quarter.
For the full fiscal year, Dell forecast adjusted earnings of $7.65 a share, up 7%, on sales of $95.5 billion, up 8%. Wall Street was modeling earnings of $7.74 a share on sales of $94.64 billion.
Dell Stock Tumbles After Q1 Report
On the stock market today, Dell stock plunged 17.9% to close at 139.56. On Wednesday, Dell stock hit a record high of 179.70.
The AI server business is highly price competitive and Dell is focused on market share gains now, analysts said.
Barclays analyst Tim Long reiterated his underweight rating on Dell stock. He also trimmed his price target to 97 from 98.
"We believe the low gross margin of AI servers, as well as the lack of pull through for other businesses, will lead to disappointing results in the next few quarters," Long said in a client note.
Plus, the growth in AI server sales is not enough to offset weak sales of personal computers and traditional servers and storage gear, he said.
AI Backlog Misses Whisper Number
Dell also disappointed with its sales backlog for artificial intelligence servers.
"While AI backlog at $3.8 billion (up 30% quarter to quarter) is impressive — buy-side whispers were in the $4 billion to 5 billion range," Evercore ISI analyst Amit Daryanani said in a client note. Still, he rates Dell stock as outperform with a price target of 165.
BofA Securities analyst Wamsi Mohan kept his buy rating on Dell stock with a price target of 180.
"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," Mohan said.
Dell's profit margins should improve as AI server sales shift to enterprises from cloud service providers and Dell sees an increased attach rate of storage and services, Mohan said.
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