On May 30, the latest quarterly report from Dell, the new favorite of the AI circuit. Although many core financial indicators exceeded expectations, the stock price fell sharply by 20% after the market on the same day due to falling profits and a lack of surprises in the backlog of AI server orders.
Morgan Stanley analyst Erik Woodring and others believe that Dell's stock price had previously surged 39% in a single month in May, reaching a record high, and its performance far exceeded the market. This sharp drop was also due to some investors' feelings of a profit settlement. However, Erik believes that this retracement is closer to an opportunity to “reverse and pick up”, and Dell still has room to rise.
Poor profitability is the result of poor storage performance and competitive prices for traditional servers
Specifically, Dell's revenue for the first quarter was US$22.2 billion, up 6.3% year over year, slightly higher than analysts' expectations of US$21.68 billion. However, Infrastructure Solutions Group (ISG)'s profit margin was only 8%, down 7 percentage points from month to month, which was the main reason for the drag on performance.
Erik Woodring said that the decline in ISG profit margins was mainly due to poor execution of the storage business, not the decline in AI server profit margins. The revenue from the storage business remained flat year over year, but the hybrid cloud product VxRail accounted for a relatively high share, leading to a decline in overall gross margin. Furthermore, the pricing competition for traditional servers also puts some pressure on profit margins.
However, it is worth noting that the AI server business performed well, and revenue, orders, and backup orders all exceeded expectations. In the quarter, Dell artificial intelligence servers achieved revenue of $1.7 billion, an increase of more than 100% year over year. New orders reached US$2.6 billion and reserve orders reached US$3.8 billion, an increase of 31% over the previous year. More importantly, AI server project leads, including orders and backup orders, reached more than $12 billion, which is several times the AI server revenue forecast for fiscal year 2025.
The analyst wrote:
This indicates that the AI server business continues to grow. We believe that our forecast for artificial intelligence server revenue of $23 billion in fiscal 2026 may be too conservative.
The AI server business is expected to continue to perform strongly in the future
In fact, of the $2.5 billion increase in overall revenue guidance for this fiscal quarter, almost 100% comes from stronger AI server revenue expectations, which fully demonstrates that AI servers are rapidly becoming Dell's new growth engine.
Regarding Client Solutions Group (CSG), Dell management said commercial PC demand is recovering, with a 3% year-over-year increase. As support for Windows 10 systems ceases in January 2025, the need for enterprise-grade PC switching is expected to be further released. At the same time, the rise of artificial intelligence PCs will also drive up sales prices.
Looking ahead, analysts expect Dell's overall revenue to grow 10.5% year-on-year to $97.5 billion in fiscal year 2025 and 6.6% to $104.1 billion in fiscal 2026. Earnings per share for the full year were $8 and $10.34, respectively, the latter up $0.22 from previous expectations.
Based on these expectations, Morgan Stanley raised Dell's target share price to $155, with 8.78% room for an increase of 8.78% from the current price. In a bull market scenario, Dell's price target is more likely to reach $200. Analysts believe that in the next few years, Dell can rely on the rapid growth of the artificial intelligence business to achieve continuous profit expansion. At the same time, stock repurchases and inclusion in the S&P 500 index will further boost stock price performance.