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

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Shares of Dell Technologies fell more than 16% Friday after investors were discouraged by the company's lower-than-expected artificial intelligence server backlog and an estimated decline in margins.

Dell reported fiscal first-quarter results on Thursday that beat analysts' expectations and offered rosy guidance. The company said revenue for the period was $22.24 billion, which was up from the $21.64 billion estimated by analysts according to LSEG.

For its second quarter, Dell said it expects earnings of $1.65 per share, and it expects sales to come in between $23.5 billion and $24.5 billion. Analysts polled by FactSet were expecting $23.35 billion. Dell guided for between $93.5 billion and $97.5 billion in sales for the full fiscal year.

The beat wasn't enough to appease investors, and shares tumbled in extended trading Thursday.

Bernstein analysts said the "principle disappointment" in Dell's results was that operating margins for its Infrastructure Solutions Group compressed year over year. Additionally, operating profits were flat compared with the same period last year, even though the company brought in around $1.7 billion in incremental AI server revenues.

The analysts said this resurfaced concerns that Dell's AI servers are being sold at "near-zero margins." In other words, the company's AI initiatives are not translating into profits yet.

"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 reported a strong quarter, and they reiterated their buy rating on the stock. However, they said the after-hours move was partly because Dell's AI server backlog of $3.8 billion was lower than estimates, and the company's growth margin is expected to decline in the 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 said in a note Thursday.

JPMorgan analysts said they were not surprised by the investor reaction to the report but added that they believe the concerns are "overblown." They maintained their overweight rating on the stock and said Dell's margin choppiness is set to create an attractive buying opportunity.

The analysts said the company is on track to expand both revenue and earnings ahead of its medium-term target, and they expect Dell will see accelerating AI demand trends and 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 wrote in a note Thursday.

— Our's Michael Bloom and Kif Leswing contributed to this report.

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