Dell Stock Plunges Amid Mounting Demand for Artificial Intelligence Servers

Fri May 31 2024
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ROUND ROCK: Dell Technologies Inc experienced a significant drop in its stock value as analysts expressed concerns about the impact of surging demand for artificial intelligence (AI) servers on the company’s gross margin. Industry experts highlighted that the rising demand for AI servers was putting pressure on Dell’s profitability, leading to a substantial decline in its stock price.

Dell executives anticipated a reduction in the company’s gross margin (a measure of profitability) by approximately 150 basis points (1.5 percent) in the current fiscal year. This expected decline was attributed to several factors: a higher proportion of AI server sales, increased input costs due to inflation, and intensified competition in the market.

Despite Dell’s first-quarter earnings report exceeding Wall Street’s expectations, the company’s stock plummeted after the announcement. Dell reported earnings before certain costs of $1.27 per share and revenue of $22.24 billion, a 6 percent increase compared to the previous year.

Although Dell’s server business experienced robust growth, with sales rising by 22 percent annually, the increase in AI server sales negatively impacted the company’s profitability. Dell’s operating income for the period decreased by 14 percent compared to the previous year.

Dell has forecasted its second-quarter revenue to be between $23.5 billion and $24.5 billion, with full-year revenue expected to range from $93.5 billion to $97.5 billion. Despite the challenges posed by AI servers to profitability, Dell believes that the momentum in AI will drive additional revenue growth throughout the year.

Experts suggest that the negative market reaction reflects concerns over Dell’s ability to maintain profitability amid changing market dynamics and heightened competition in the AI server sector, overshadowing other positive aspects of its performance.

Conversely, another data center hardware supplier, NetApp, saw an increase in its stock value due to positive results driven by growing interest in AI. NetApp’s success underscores the increasing importance of AI and cloud computing in driving revenue growth for data center hardware suppliers.

NetApp recorded revenue of $1.67 billion in its fiscal 2024 fourth quarter, marking a 17 percent increase from the previous year. The company’s Hybrid Cloud segment, which generates the majority of its revenue, saw strong sales growth.

NetApp attributed its positive performance to increased business spending on cloud computing services and the shift from traditional “on-premises” servers to cloud-based solutions, contributing to its positive trend.

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