Michael Dell is having a great year.
His eponymous company is a leading supplier of data center construction, selling Nvidia-based servers, racks, cooling, and support for CoreWeave and xAI, while collaborating with Nvidia, Google, and OpenAI on systems that enterprises can use to run advanced software. Michael Dell’s net worth soared to $217 billion as the stock price soared, making him the world’s fifth-richest person, as Dell beat revenue expectations last month.
But there’s a quieter story behind the revenue growth. Dell’s gross profit has fallen 26% since the company first reported AI-optimized server revenue at the end of February 2025. This is despite the fact that AI currently generates 10 times more revenue than laptops and computers.
In its latest earnings report, the company acknowledged that AI servers are driving gross margins by 18.1%, with AI now accounting for 37% of Dell’s total revenue, suggesting that AI-optimized servers have lower gross margins than Dell’s traditional products. Analysts are debating whether selling more AI servers will lead to a permanent profit stream for Dell, or whether Dell will take on a much larger but lower-margin role as a company that packages expensive Nvidia-based systems for building AI.
“It’s not all red flags, but it’s a sign of a change in the business model,” said Aswath Damodaran, a highly respected equity analyst and professor at New York University’s Stern School of Management, nicknamed the “head of valuation.” luck By email. “Decreasing gross margins indicate deteriorating unit economics and, unless this is temporary, should be factored into Dell’s ongoing profitability story.”
Despite this, 18 analysts on the street rate the stock as a buy. One person gave Fortune an eloquent case for why this trajectory is sustainable.
said James Fish, senior research analyst for digital infrastructure at Piper Sandler. luck If growth stops increasing gross margins, the hit to gross margins will only reduce profitability. He added that he doesn’t see that happening for Dell at this point, even if its partner Nvidia reaps more profits in this space.
“It would be a problem if it turns out that revenues are not increasing at all,” Fish said, but noted that the compression of gross profits is “one of the topics being discussed” amid rapid growth.
A Dell spokesperson said: luck He said the company’s AI business “has grown on top of a very strong core business” and that the company’s goal is to “maintain stable gross margins in each business area.” Dell previously told investors in February 2025 that it expected AI servers to reduce profit margins.
Dell isn’t the first high-tech hardware company to face margin pressure.
Hewlett Packard Enterprise has also seen demand for AI servers drive up revenue while weighing on gross margins, and Cisco has seen product margins come under pressure due to sales mix and rising memory costs, illustrating the potential trade-offs to profits despite strong hardware demand. Alternatively, IBM got out of the PC business in the early 2000s, then abandoned hardware almost entirely and focused instead on high-margin software.
“I think this mixed shift will put some pressure on that line from a percentage standpoint for the next few years,” Fish said.
