The Stock of Dell is Clawing Back After a Decline Post-earnings

Dell Technologies Inc.’s stock continues to rise on Tuesday, though it remains about 15% below its all-time high reached late last month following its earnings report.

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The latest earnings report did not meet Wall Street’s high expectations, primarily because it highlighted how the artificial-intelligence (AI) server boom isn't positively impacting margin rates. BofA analyst Wamsi Mohan noted that while AI servers contribute to margin dollars, they dilute the margin rate due to the significant cost of graphics processing units, which are a substantial part of Dell’s bill of materials. Nonetheless, Mohan and a few other analysts remain optimistic about Dell’s future margin improvements.

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Following recent meetings with Dell's management, Mohan expressed confidence that Dell’s margins have the potential to grow. He attributes this to contributions from services, consulting, support, and related areas that are recognized over time after being deferred onto the balance sheet. Additionally, Mohan pointed out that increasing power costs could prompt customers to upgrade their servers, particularly since liquid-cooling options can enhance the return on investment.

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Mohan is also optimistic about the future opportunities in sovereign AI, as nations strive to advance their AI capabilities. He believes sovereign AI could become a significant future opportunity, potentially rivaling or exceeding the market from serving tier-2 cloud providers. Following the management meetings, Mohan and his team remain confident in the multi-year potential related to AI.

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Dell’s stock is up 7.6% in midday trading after a 5.2% rise on Monday.

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Similarly, Morgan Stanley analyst Erik Woodring has an upbeat outlook after his meetings with Dell's management. These meetings gave him “greater confidence in the path forward,” as he wrote in a Monday report.

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Woodring is increasingly convinced that Dell’s recent momentum in AI servers and its competitive positioning, particularly its engineering capabilities, will sustain or even accelerate. He also believes that Dell is addressing competitive gaps in its storage business, which should benefit its growth. Additionally, Woodring noted that Dell’s client solutions group, which includes personal computers, is well-positioned to outperform the market.

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Woodring believes these factors are likely to accelerate revenue and earnings revisions, driving further multiple expansion over the next 12 months.

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In summary, despite the latest earnings report not meeting high expectations due to AI server margin issues, analysts like Mohan and Woodring remain optimistic about Dell’s potential for future margin improvement and growth. They cite contributions from various services, potential in sovereign AI, and Dell’s strong positioning in AI servers and storage solutions as reasons for their positive outlook. This optimism is reflected in the continued rise of Dell's stock, suggesting confidence in the company’s multi-year growth prospects.

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