Dell Shares Plunge After ‘AI Server Backlog Missed Expectations’ 

Shares of Dell Technologies plunged the most in years in premarket trading in New York after the company posted in-line fiscal first-quarter results that showed the first revenue increase since 2022. Despite this positive news, investors were primarily concerned with the performance of the company’s artificial intelligence server business, which fell short of expectations.

The Texas-based company said Thursday that sales increased 6.3% to $22.24 billion in the quarter ending May 3. Analysts tracked by Bloomberg estimated an average of $21.62 billion. Profit topped $1.27 a share, beating analysts’ estimates of $1.23. 

Revenue from Dell’s AI servers doubled from the previous quarter to $1.7 billion, Chief Operating Officer Jeff Clarke said in the statement. He noted that the backlog for those servers increased more than 30% quarter-over-quarter to $3.8 billion. 

However, Morgan Stanley analyst Erik Woodring pointed out that the strong quarter was overshadowed by the AI server backlog, which fell short of expectations. 

Here’s a snapshot of earnings (courtesy of Bloomberg):

• Adjusted EPS $1.27 vs. $1.31 y/y, estimate $1.23

• Total net revenue $22.24 billion, estimate $21.62 billion

• Infrastructure Solutions Group net revenue $9.23 billion, +22% y/y, estimate $9.06 billion

• Servers and Networking revenue $5.47 billion, estimate $4.89 billion

• Storage revenue $3.76 billion, estimate $3.98 billion

• Client Solutions Group net revenue $11.97 billion, -0.1% y/y, estimate $11.51 billion

• Commercial revenue $10.15 billion, estimate $9.66 billion

• Consumer revenue $1.81 billion, estimate $2.06 billion

• Adjusted operating income $1.47 billion, estimate $1.48 billion

Second quarter forecast:

• Sees revenue $23.5 billion to $24.5 billion, estimate $23.17 billion

Full-year forecast: 

• Sees revenue $93.5 billion to $97.5 billion, estimate $94.62 billion (Bloomberg Consensus)

• Sees adjusted EPS $7.40 to $7.90, estimate $7.70

With AI server sales and backlog failing to impress investors, shares of Dell tumbled 15% in premarket trading. If premarket gains hold into the cash session and settle more than -13% (Aug. 26, 2022) by the end of the session – this would be the largest single daily decline ever since re-entering public markets in late 2018. 

Parabolic moves higher never end well. 

Here’s what the rest of Wall Street analysts are saying about Dell’s earnings (courtesy of Bloomberg):

Morgan Stanley analyst Erik Woodring (overweight, PT to $155 from $152)

• While near-term expectations get ahead of themselves, confidently buying the dip
• Dell’s unexpectedly strong April quarter revenue was overshadowed by AI server backlog missing expectations

JPMorgan analyst Samik Chatterjee (overweight, PT $155)

• Dell’s margin choppiness is creating “a more attractive buying opportunity”
• Investors are likely to get anxious as the company’s strong revenue growth is coming at a cost “with margins coming in below expectations for both the reported and guided-to quarters”

Bloomberg Intelligence analyst Woo Jin Ho

• While Dell’s AI-server sales have come in strong, its profit “less so”
• “Setting aside the frothy expectations, the momentum in Dell’s AI-server results is better than anticipated”

Evercore ISI analyst Amit Daryanani (outperform, PT $165)

• While Dell’s results were “fairly solid,” its shares “reacted negatively post the print reflecting very high expectations”

Although Dell’s quarterly results were strong, the adoption of AI is still in its early stages, and investors had extremely high expectations to start.

On Thursday, Goldman tech trader Peter Callahan pointed out (read our full note here) a “very tough session today that saw: 1) extreme pressure across the software space (largest 1d move lower in ~2 years),  2) a big reversal in recent Momentum winners (NVDA / FICO / IT / DELL / MU types down -4%), and 3) sneaky outperformance of defensives, specifically (names like VZ, T, AMAT, SBAC, CMCSA up +2-4%).”

Callahan provided color on the Salesforce implosion:

• Software was clearly the focus today with CRM -20% on the day (worst day in 20+ years), which set the tone early and appeared to trigger what felt like capitulation…

Another must-read is “Goldman: There Is Growing Fatigue Around The Lack Of Performance Outside Of AI And Mag 7. “