Dell’s profit, margin hurt by higher AI costs, shares slump

Dell (DELL.N) projected lower-than-expected profits for the current quarter on Thursday, signaling that increased expenses for constructing servers capable of handling intensive AI tasks would impact annual margins. This forecast led to a more than 17% decline in its shares during after-hours trading. The Texas-headquartered company anticipates a decrease of approximately 150 basis points in its adjusted gross margin rate for fiscal 2025. For the ongoing quarter, it forecasts an adjusted profit per share of $1.65, with a range of plus or minus 10 cents, contrasting with analysts’ average estimate of $1.84, as per LSEG data.

“Given inflationary input costs, the competitive environment, and a higher mix of AI-optimized servers, we do expect our gross margin rate to decline,” stated Chief Financial Officer Yvonne McGill during a post-earnings call. The surge in demand for high-performance computing and large-scale data centers to accommodate the increasing adoption of generative AI has prompted investments in AI-capable products. Consequently, there’s been a heightened demand for servers from companies such as Dell.

“Their margin decline reflected the competitive pricing environment as the market had not fully recovered yet and Dell’s competitors tried to grab share in this tight market,” commented Mikako Kitagawa, director analyst at Gartner. Chief Operating Officer Jeff Clarke highlighted that shipments of the company’s AI-optimized servers surged, surpassing $1.7 billion, while the backlog expanded by over 30% to reach $3.8 billion, as stated in a released statement. Dell recently introduced a lineup of AI-enabled PCs powered by Qualcomm processors and announced plans for a new server, compatible with Nvidia’s latest chips, slated for release in the second half of 2024. Despite the challenges, Dell’s stock has more than doubled this year, reaching a record high earlier this week. The company anticipates second-quarter revenue to range between $23.5 billion and $24.5 billion, exceeding the average estimate of $23.21 billion.