Dell Q1 AI server revenue hits a record high, but profit pressure fails to impress investors, plunging 14% after hours | Financial Report Insights

After the U.S. stock market closed on Thursday, May 30th, Dell Technologies, a leading manufacturer of personal computers and servers established for 40 years, released its financial report for the first quarter of the 2025 fiscal year. Prior to the financial report, various mainstream Wall Street investment banks raised their target prices for the company.

Despite Dell's total revenue and segment business income exceeding expectations, with a backlog of AI server orders reaching as high as $3.8 billion, a quarterly increase of 30%, it failed to impress investors who had high hopes for AI. Additionally, the adjusted EPS earnings declined, leading to a significant 14% drop in the stock price after hours.

Some analysts also pointed out that Dell did not directly provide guidance for the next quarter in the financial report statement, which also contributed to the sharp decline in the stock price. However, Dell stated that guidance would be provided during the financial report conference call.

Dell's stock fell by 5.2% on Thursday, ending a six-day winning streak, the longest in ten months. It had set historical highs for four consecutive trading days prior. Dell's stock price has doubled since the beginning of the year, with a cumulative increase of over 120%, far exceeding the S&P 500 index's 11% increase during the same period.

Analysts believe that riding the wave of AI, Dell's continued improvement in growth prospects will continue to support the stock price hovering at new highs. The fact that its valuation is lower than other popular AI technology stocks, as well as market speculation about its imminent inclusion in the S&P 500 index, are all positive factors for the stock price.

Currently, Dell's price-to-earnings ratio is 22 times expected earnings, higher than the Nasdaq 100 index which is dominated by technology stocks, as well as other AI companies such as Nvidia, AMD, and Microsoft, all of which have significant discounts. However, it is already much higher than Dell's five-year average of 5.8 times and is at its highest level.

Based on this, asset management firm Deepwater Asset Management referred to Dell as both a growth stock and a value stock. Compared to other artificial intelligence companies, its price-to-earnings ratio is still very low, and the growth potential of its personal computer and server business is underestimated.

Q1 Revenue sees year-over-year growth for the first time in two years, but adjusted EPS earnings slightly below some market expectations

The market is highly focused on Dell's ability to expand its AI business, and in fact, Dell's first-quarter report exceeded market expectations across the board.

Quarterly revenue increased by 6% year-over-year to $22.2 billion, higher than the market's expected $21.6 billion and above the company's official guidance range of $21 billion to $22 billion. Analysts note that this is Dell's first year-over-year revenue growth since 2022.

Adjusted earnings per share were $1.27, a 3% decrease year-over-year, but higher than the market's expected $1.23 and the company's official guidance of $1.15. However, some analysts were hoping for an EPS of $1.29. GAAP earnings per share increased by 67% year-over-year to $1.32At the same time, the quarterly operating profit was $920 million, with non-GAAP operating profit at $1.47 billion, down 14% and 8% year-on-year respectively, with the latter falling short of the expected $1.48 billion. Cash flow from operating activities was $1 billion. $1.1 billion was returned to shareholders through stock repurchases and dividends, with total cash and investments at the end of the quarter amounting to $7.3 billion.

AI Optimization Doubles Server Shipment Growth, Driving Server and Networking Revenue Up 42% to a New High

Dell's business is mainly composed of the Client Solutions Group (CSG) and the Infrastructure Solutions Group (ISG). The former focuses on personal computers (PCs), segmented into revenue from commercial clients and consumers, while the latter includes revenue from servers and networking, as well as storage.

In the first quarter, Infrastructure Solutions Group revenue grew by 22% year-on-year to $9.2 billion, exceeding market expectations of $9.06 billion. Among them, server and networking revenue increased by 42% year-on-year to $5.5 billion, reaching a historical high. Storage revenue remained flat at $3.8 billion.

The company stated that this was mainly due to strong demand for both AI-optimized servers and traditional servers:

Shipments of AI-optimized servers increased by over 100% compared to the previous quarter, doubling to $1.7 billion. The backlog of orders for such servers surged by 30% from $2.9 billion at the end of January to $3.8 billion.

However, some analysts pointed out that although Dell's AI server backlog grew rapidly during the quarter, the significant double-digit drop in the stock price after hours indicates that the $3.8 billion backlog failed to impress investors who had high hopes for the company's AI technology.

Meanwhile, Client Solutions Group revenue remained flat year-on-year at $12 billion, but exceeded Wall Street's expectations of $11.7 billion. Revenue from commercial client PCs increased by 3% to $10.2 billion, while consumer PC revenue decreased by 15% to $1.8 billion. Some analysts suggest that this indicates that some commercial clients have begun replacing aging PC hardware.

Dell's CFO pointed out that artificial intelligence continues to drive new growth, and the financial report demonstrates the company's execution and ability to generate strong cash flow. Over the past 12 months, the company has generated $7.9 billion in cash flow from operationsThe company's Chief Operating Officer emphasized:

"No company is better positioned than Dell to bring artificial intelligence into enterprises. Servers and networking achieved record revenues in the first quarter, with our AI-optimized server orders increasing by a quarter-on-quarter growth to $2.6 billion, with shipments up over 100%."

How does Wall Street view this?

On the day before the financial report was released, U.S. Bank securities analyst Wamsi Mohan raised Dell's target price from $130 to $180 and reiterated a "Buy" rating, citing that Dell is undervalued and underowned by investors, with potential growth catalysts such as artificial intelligence. The stock price also has upside potential due to the possibility of being included in the S&P 500.

Last week, Dell launched five new types of artificial intelligence personal computers (AI PCs), AI servers, all-flash file storage, and network architecture. It also announced an expanded partnership with NVIDIA to build large-scale end-to-end systems for enterprises through the Dell AI Factory.

Based on this, U.S. Bank believes that the expansion of the AI product portfolio, demand for AI servers, storage demand driven by IBM mainframe updates, and the replacement cycle of personal computers under AI assistance will support Dell's growth by 2025:

"Dell benefits from data centers upgrading infrastructure to support generative AI, as well as the launch of AI PCs. A wide product portfolio, AI advantages, faster-than-market growth trends, continued market share gains, and profit growth opportunities brought by the migration of storage, PCs, and servers to high-end configurations in the coming years can offset risks such as global economic slowdown and high financial leverage."

Morgan Stanley expects the penetration rate of AI personal computers to be 2% this year, rising significantly to 16% next year, and reaching 28% by 2026. Research firm Canalys is more optimistic, forecasting 100 million AI-equipped personal computers by 2025, accounting for about 40% of the market share. This will benefit PC manufacturers such as HP and Dell, with HP reporting its first increase in PC sales in two years in yesterday's financial report.

Hunter Wolf Research points out that Dell has been collaborating with major GPU manufacturers to launch AI-optimized servers, which could change its growth prospects. For example, Dell recently announced that it will offer NVIDIA's next-generation powerful Blackwell GPU in servers.

Investment bank Evercore ISI recently raised Dell's target price from $140 to $165, stating that Dell has won a significant portion of the business for Tesla's AI server construction, which could bring in revenue opportunities of $2.5 billion to $3 billion, possibly this year.

Investment management firm Neuberger Berman stated that "Dell is becoming an increasingly important strategic supplier in the AI ecosystem," but the strong growth momentum of AI may slow down with the macroeconomic downturn, indicating that the demand for AI systems remains cyclical