Market Analysis

Dell Forecasts Margin Drop as AI Server Costs Soar

Amos Simanungkalit · 28 Feb21.9K Views

Image Credit: Reuters

On Thursday, Dell forecast a decline in its adjusted gross margin rate for fiscal year 2026 due to rising costs in manufacturing artificial intelligence (AI) servers, amid stiff competition in the market. The company's PC business also faced challenges with sluggish demand.

Shares of the Texas-based company dropped by about 2% in after-hours trading, despite announcing a $10 billion increase in its share buyback program. Dell’s AI servers, powered by Nvidia's high-performance chips, are designed to handle the intensive computational requirements of training large language models like those behind chatbots such as ChatGPT.

This demand has spiked for Dell and its competitors, such as Super Micro Computer. Dell projects $15 billion in AI server revenue annually, a 53% increase from the $9.8 billion revenue in the year ending January 31. However, the expensive production of these AI servers is negatively impacting margins. Dell expects its adjusted gross margin rate to decrease by around 100 basis points.

As of February 27, the company reported an AI server backlog of approximately $9 billion and also secured a deal with Elon Musk’s xAI startup. Dell has forecast an annual adjusted profit of $9.30 per share, slightly exceeding analysts' expectations of $9.23. Its revenue forecast for the year, at a midpoint of $103 billion, aligns with estimates.

The company is also monitoring a potential U.S. trade tariff on Chinese products, which could lead to higher prices on tech products and automotive manufacturing. Dell said it is reviewing the executive orders related to tariffs to assess their impact on its operations and customers. However, it noted that these tariffs have not yet affected pricing.

Dell’s revenue for the fourth quarter, ending January 31, totaled $23.93 billion, falling short of the $24.56 billion estimate. The company reported adjusted earnings of $2.68 per share, which exceeded expectations of $2.53. Revenue from its Infrastructure Solutions Group, which includes storage, software, and servers, rose 22% to $11.35 billion. Revenue from its Client Solutions Group, which includes PCs, increased by just 1% to $11.88 billion.