Dell Technologies Experiences Significant Upturn Due to Strong Demand for Nvidia's AI Processors That Power Specialized Servers

The challenge lies in the operating margins, which at 8% are significantly below the average of the last four quarters. This development suggests that Dell is selling its most in-demand products near the break-even point. After the results were published on May 30, Dell's shares dropped by almost a quarter of their value.

During the earnings call, the company, led by CEO Michael Dell, pointed out that various factors contributed to the disappointing margins, including weaker sales in the data storage segment and the deferral of a significant portion of service and support revenues that usually accompany server sales. This deferral is expected to lead to better margins in the future. Analysts now anticipate that ISG margins will rise to about 11.5% by the end of the fiscal year in January.

Despite the intense competition in the field of AI hardware, particularly from rivals like Hewlett Packard Enterprise and Super Micro Computer, Dell remains the market leader in the overall server market. However, Super Micro achieved a 30% market share in AI servers in the first quarter, compared to Dell's 23%. Nevertheless, Morgan Stanley analyst Erik Woodring emphasized Dell's advantage in delivering highly specialized servers and a comprehensive range of products and services necessary for building AI networks.

Another potential catalyst for the stock could be its inclusion in the S&P 500, as Dell currently has the second-highest market capitalization among the eligible companies. Improved profitability in the AI server business in the coming quarters could make Dell an attractive investment opportunity. The stock is currently trading at a significantly more favorable price-to-earnings ratio of almost 18 compared to Super Micro's multiple of 29.