Why Dell Can Continue Winning in AI and Beyond

August 31, 2024 at 07:00 AM EDT

Dell computer corporate facility and logo. Dell Inc. is a multinational computer technology company.

Dell Technologies (NYSE: DELL) has rallied this year as the legacy personal computer firm has been transitioning its business toward the fast-growing AI space.

Shares have provided a total return of nearly 50% this year, greatly outperforming the market and the technology sector. The Technology Select Sector SPDR Fund (NYSEARCA:XLK) has returned just 15% in 2024.

Dell: Changing Where its Bread is Buttered

Dell breaks its business down into two operating segments: its Infrastructure Solutions Group (ISG) and its Client Solutions Group (CSG). ISG focuses on helping large organizations achieve their “digital transformation” goals. Specifically, it helps these businesses unlock the power of AI, machine learning, and big data analytics.

Within this segment, the company’s "servers and networking” division has been the key driver of growth for the entire firm recently. Particularly in the last two quarters, growth has absolutely exploded. As of its latest earnings release, revenue in this division grew from $4.9 billion in February to nearly $7.7 billion. This is a 58% increase in a matter of just six months.

On the other side is the CSG business. This is where many have traditionally come to know Dell as a powerhouse in computers people use at home and at work. Dell's commercial division, which sells its branded laptops and desktops to businesses, is still its biggest revenue source. Last quarter, it brought in $10.5 billion in revenue.

However, growth has slowed to a snail's pace, increasing 0% from the previous year as of the firm’s most recent results. Things are even worse on the consumer-oriented side of the business, with revenues down 22%.

Overall, CSG still leads in terms of total revenue share, coming in at 52% last quarter. However, if current trends continue, the ISG business will become the leader in revenue share next quarter. It grew 26% from fiscal Q1 2025, compared to just a 3.7% rate for CSG.

For the future of the company’s earnings, this is a positive development. The operating margin of the ISG in fiscal Q2 was 11%, significantly higher than the 6% seen in CSG. However, the operating margin in ISG has seen significant fluctuations in recent quarters. Getting that ironed out to a stable and then progressively growing level will go a long way for Dell.

Dell’s Aug. 29 Financial Results Show Strength

In its latest fiscal Q2 2025 financial results, Dell impressed the market, beating expectations. Total revenue of $25.1 billion came in over $500 million higher than consensus forecasts. Adjusted earnings per share (EPS) of $1.89 equated to a positive earnings surprise of over 10%.

It was good to see the company’s increased sales of AI-optimized servers. This increased by 23% from the previous quarter to $3.2 billion. This was over double the sales it saw in all of fiscal 2024.

Based on all this positive news, Dell’s shares jumped 3.7% in after-hours trading.

Dell Is Poised to Continue Success in AI-Servers and Recover in CSG

Dell's strength in the AI server business is set to continue as we look ahead. The company has a $3.8 billion backlog of these devices, more than double the revenue it saw in the previous quarter. While this means demand is strong, it also poses a reason for concern.

Excessive and prolonged backlogs could cause customers to become unhappy as they wait a long time to get their products. This could damage the future relationship with that customer. It could also make potential customers doubt Dell's ability to meet their needs quickly. They might then turn to competitors for products.

However, the company is making headway here. Although the backlog was unchanged from the previous quarter, this is a significant improvement from the 30% increase in backlog seen in fiscal Q1. Dell's COO, Jeffrey Clarke, noted in the earnings call that supply constraints are improving.

Looking further into future demand, Dell also said it has a huge pipeline of potential AI-server deals it is working to close. It said the pipeline “has grown to several multiples of our backlog." This shows strong future demand for the products and that potential customers aren't discouraged by Dell's large backlog.

Additionally, Dell expects its CSG segment to return to growth in the second half of the year. The coming PC refresh cycle could allow the firm to have two solidly growing segments rather than just one over the coming years. Dell’s 1.55% dividend yield is a bonus to shareholders.

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Why Dell Can Continue Winning in AI and Beyond

Dell: Changing Where its Bread is Buttered

Dell’s Aug. 29 Financial Results Show Strength

Dell Is Poised to Continue Success in AI-Servers and Recover in CSG

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