Dell (NYSE:Dell) is no longer just a server and personal computer (PC) company. Demand for the hardware that powers artificial intelligence (AI) has soared historically, sending stock prices soaring. It has almost tripled in the last 12 months.
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The demand driving the rally was impressive. In the first quarter, Dell reported AI-optimized server revenue of $16 billion, up from less than $2 billion last year. The company currently has a $51.3 billion backlog for AI servers and has raised its full-year revenue outlook for the sector to about $60 billion.
The market responded by reevaluating Dell from a mature PC vendor to a core AI infrastructure player. The new valuation raises expectations, especially on the earnings front. To maintain its new valuation, Dell will need to prove it can convert these orders into solid revenue growth.
Backlog built on AI
Dell’s transformation is driven by its ability to capture a significant share of enterprise AI builds. The company booked $24 billion in AI server orders in the quarter as its customer base grew to more than 5,000 companies.
Dell leverages its core strengths to win these deals. Our scale and integrated portfolio allows us to design and deploy entire AI factories for enterprise, neocloud, and government customers.
The company’s supply chain, which combines in-house manufacturing and a network of contract partners, responds to changing demand and helps secure critical components such as graphics processing units (GPUs) in supply-constrained markets. This end-to-end capability reduces complexity and procurement costs for customers.
The results are visible in the company’s Infrastructure Solutions Group (ISG), which handles the server and storage business. The division currently generates more than 80% of Dell’s total operating income and has a profit margin of 11.7%, making it a clear profit driver for the company.
The AI wave is also starting to spur growth in Dell’s traditional server business as companies upgrade their entire IT stacks to support growing workloads. Meanwhile, a refresh cycle for commercial PCs is underway, contributing to increased profitability for Dell’s Client Solutions Group. This combination provides the company with new avenues of growth while generating reliable cash flow.
high cost of growth
Although ISG’s overall profitability is healthy, the revenue mix within the segment is changing, putting pressure on margins. The AI-optimized servers driving growth have significantly lower profit margins than Dell’s traditional enterprise hardware.
