Dell stock plummet amid mounting demand for AI servers

ROUND ROCK: Dell Technologies Inc saw the value of its stock plummet substantially as analysts expressed concerns about how surging demand for artificial intelligence (AI) servers affected the company’s gross margin.

Experts in the industry raised concerns over the impact of rising demand for AI servers on Dell’s gross margin, causing a significant drop in the company’s stock value.

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Dell executives had expected a decrease in the company’s gross margin (a measure of its profitability) by about 150 basis points (1.5 per cent) in the current fiscal year. The decline was expected due to several factors: the greater proportion of AI servers being sold, rising input costs due to inflation, and increased competition in the market.

Even though Dell’s first-quarter earnings report exceeded Wall Street’s predictions, the company’s stock took a nosedive after the announcement. Dell reported earnings before certain costs of $1.27 per share and revenue of $22.24 billion, showing a 6 per cent rise compared to the previous year.

Although Dell’s server business experienced exceptional growth, with sales increasing by 22 per cent annually, the rise in AI server sales seems to have adversely affected the company’s profitability. Dell’s operating income for the period dropped by 14 per cent compared to the previous year.

Dell has predicted that its revenue for the second quarter will be between $23.5 billion and $24.5 billion, and for the full year to be between $93.5 billion and $97.5 billion. Despite the challenges AI servers present to profitability, Dell stated it believes that the momentum in AI will contribute to additional revenue growth throughout the year.

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Experts say that the negative market reaction reflects concerns about Dell’s ability to maintain profitability amid shifting market dynamics and increased competition in the AI server segment. This also overshadows any positive aspects of its performance elsewhere.

NetApp’s success

Meanwhile, another company supplying data center hardware NetApp experienced a rise in its stock value due to positive results linked to the growing interest in AI.

In contrast, NetApp’s positive results were well-received, with the company’s stock performing steadily. NetApp’s success underscores the growing importance of AI and cloud computing in driving revenue growth for data center hardware suppliers.

The company recorded revenue of $1.67 billion in its fiscal 2024 fourth quarter, marking a 17 per cent increase from the previous year. NetApp’s Hybrid Cloud segment that is responsible for the bulk of its revenue saw strong sales growth.

NetApp saw earnings of $1.80 per share and a net income of $291 million, compared to $245 million in the corresponding period of the previous year.

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NetApp expects its first-quarter revenue to fall within the range of $1.46 billion to $1.61 billion, with full-year revenue projected to range between $6.45 billion and $6.65 billion.

The company attributed its positive performance to the increased spending by businesses on cloud computing services. The transition from traditional “on-premises” servers to cloud-based solutions also contributed to NetApp’s positive trend.