Dell's AI business fails to meet expectations: what went wrong? (06/04/2024)

Hello, everyone! This week’s spotlight is on Dell Technologies Inc. $Dell Technologies(DELL.US)$, the world’s leading PC maker, whose stock has soared over the past year due to increased demand for artificial intelligence (AI) hardware. We’ll explore the latest trends and take a close look at the company’s recent market activity.

What’s new?

On May 31, 2024, Dell’s shares plummeted nearly 18%, marking the company’s largest single-day decline since returning to the public market in 2018.

Despite a 6.3% sales increase to $22.2 billion for the quarter ending May 3, beating analysts’ estimate of $21.6 billion, Dell’s first-quarter report fell short of investors’ high expectations for its AI server business.

According to the report, Dell’s operating income was $920 million and non-GAAP operating income was $1.5 billion, representing a 14% and 8% decline year over year, respectively. The decrease in adjusted operating margin raised concerns that AI servers are being sold at near-zero margins, thereby impeding the translation of the company’s AI initiatives into profits.

Dell raised its revenue outlook for the fiscal year ending in February 2025 to between $93.5 billion and $97.5 billion, which represents an 8% increase at the mid-point. However, the outlook suggests relatively flat AI server sales for the remainder of the year, potentially casting doubt on the company’s near-term competitiveness, according to Bloomberg Intelligence analyst Woo Jin Ho.

While some investors expressed disappointment, Bank of America analysts reiterated their buy rating on the stock, stating that Dell had reported a robust quarter. However, they attributed the sharp decline in Dell’s share price to the company’s lower-than-estimated AI server backlog of $3.8 billion and its expected decline in growth margin for the fiscal year.

JPMorgan analysts maintained their overweight rating on the stock, emphasizing that Dell’s margin volatility is likely to create an appealing buying opportunity. Ultimately, the concerns surrounding Dell’s first-quarter report may be overblown.

Chart of the day

Trend analysis:

Since March 2023, Dell’s shares (DELL) have been on a robust uptrend, soaring from $35 to as high as $179. Following the company’s earnings results, there were two significant price surges, with the stock rising 21% and 32% on September 1, 2023 and March 1, 2024, respectively.

However, the most recent price decline, over 20% within two days, technically marks a bear market for the stock.

Technical indicators:

• DELL traded above the 50-day moving average (MA50) for nearly six months. Nevertheless, following the recent price decline, the MA50’s potential support might break.

• The surge in trading volume, with a one-day turnover ratio of about 25%, indicates market panic, and there is a likelihood of increased volatility in the short term.

• Before hitting record highs, the stock formed an ascending triangle, a continuation price pattern. The horizontal trendline of the pattern is around $135, which could act as potential support or resistance.

• Momentum oscillators, such as the relative strength index (RSI) and the KDJ indicator, have dropped below the midpoint level (50), indicating a short-term bearish sentiment in the market.

Next move?

As of June 4, 2024, data from Market Position Overview, which shows the number of shares held at various prices by investors, indicates that the average price of all DELL positions is $137.8. With 51.72% of positions being profitable, it suggests that neither bulls nor bears are dominating the market.

Traders may keep an eye on the potential support or resistance of $135 as well as the MA50.

This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.

All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.