Technology
Friday, May 31st, 2024 6:36 pm EDT
Key Points
- Stock Decline Due to AI Server Concerns: Shares of Dell Technologies fell over 16% after the company’s lower-than-expected AI server backlog and projected decline in margins disappointed investors, despite the fiscal first-quarter results beating analysts’ expectations.
- Financial Performance and Guidance: Dell reported first-quarter revenue of $22.24 billion, surpassing the estimated $21.64 billion, and provided strong guidance for the second quarter with expected earnings of $1.65 per share and sales between $23.5 billion and $24.5 billion. For the full fiscal year, Dell forecasted sales between $93.5 billion and $97.5 billion.
- Analyst Reactions and Margin Concerns: Analysts highlighted that the primary issue was the compression of operating margins in Dell’s Infrastructure Solutions Group, and flat operating profits despite significant AI server revenue. Concerns were raised about AI servers being sold at low margins, affecting profitability. While some analysts viewed the reaction as overblown and maintained positive ratings, they acknowledged the need for Dell to improve margins and meet high investor expectations.
Shares of Dell Technologies fell by more than 16% on Friday after investors reacted negatively to the company’s lower-than-expected backlog of artificial intelligence (AI) server orders and anticipated margin decline. Despite reporting fiscal first-quarter results on Thursday that exceeded analysts’ expectations, the positive news was overshadowed by concerns about profitability and growth. Dell announced a revenue of $22.24 billion for the period, surpassing the $21.64 billion forecast by analysts. For the second quarter, the company projected earnings of $1.65 per share and anticipated sales between $23.5 billion and $24.5 billion, compared to analysts’ estimates of $23.35 billion. Dell also provided full fiscal year sales guidance ranging from $93.5 billion to $97.5 billion.
However, the earnings beat was insufficient to satisfy investors, leading to a significant drop in shares during extended trading on Thursday. Analysts from Bernstein highlighted the primary concern: operating margins for Dell’s Infrastructure Solutions Group had compressed year over year. Operating profits remained flat compared to the previous year, despite Dell generating approximately $1.7 billion in additional AI server revenues. This raised worries that Dell’s AI servers are being sold at very low margins, indicating that the company’s AI ventures are not yet contributing significantly to profitability.
In a note released on Friday, Bernstein analysts expressed their disappointment with Dell’s first-quarter results, given the high expectations. Bank of America analysts acknowledged Dell’s strong quarter and reiterated their buy rating, yet noted that the after-hours stock decline was partly due to the lower-than-expected AI server backlog of $3.8 billion and the anticipated decline in growth margins for the fiscal year. They remain optimistic about Dell’s potential to capture higher AI margins over time, considering the early stages of AI adoption and the strong pipeline of AI server demand.
JPMorgan analysts were not surprised by the investor reaction but considered the concerns to be exaggerated. They maintained their overweight rating on Dell, suggesting that the current margin volatility could present a favorable buying opportunity. They believe Dell is poised to surpass its medium-term revenue and earnings targets, driven by accelerating AI demand and a recovery in its traditional infrastructure business. The analysts anticipate continued investor disappointment due to high expectations for rapid margin improvements, but they foresee monitoring and execution towards promised margin enhancement throughout the year.
In summary, Dell’s fiscal first-quarter results, while exceeding expectations, have highlighted ongoing issues with profitability and margins, particularly within its AI server segment. Despite the company’s positive revenue guidance and strong market position, investor concerns about immediate financial benefits from AI initiatives have led to significant market backlash. Nonetheless, some analysts remain confident in Dell’s long-term prospects and suggest that the current stock dip may offer a strategic investment opportunity.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/05/31/dell-shares-fall-ai-servers-concerns.html
