$DELL

Dell Earnings Preview: AI Margins to Be Key

Dell Technologies will release its second-quarter earnings after market close on Tuesday, September 1st. The stock has gained approximately 265% year-to-date, driven by demand for AI servers. This surge has transformed the company from a mere computer manufacturer into a central player in AI infrastructure.

Options Market Preparing for Volatility

The options market is anticipating significant movement in the stock after the earnings report. September 4th futures contracts are pricing in a volatility of 11.4%. The cost of a straddle at the current strike price of $455 is approximately $52. This level indicates that investors are preparing for a sharp price movement depending on the results.

Growth in AI Demand

Dell's AI server business has been a key driver of the company's growth in recent quarters. In the previous quarter, AI-optimized server revenue increased 757% year-over-year to $16.1 billion, and the company received $24.4 billion in new orders. These orders brought Dell's backlog of AI server orders to $51.3 billion.

Wall Street expects adjusted earnings of $4.91 per share and revenue of $44.93 billion for the current quarter. These figures represent a 50.9% year-over-year increase in revenue. Dell management had previously targeted revenue of $44-45 billion and earnings per share of approximately $4.80 for this quarter.

Margins: The Biggest Question Mark

The main focus for analysts and investors is the profitability of AI servers. These servers have significantly lower margins compared to the company's traditional hardware products. While management is targeting mid-single-digit operating margins for AI servers, the average margin for the company's infrastructure solutions group is 10.5%.

Last quarter, gross profit margin fell 330 basis points to 17.8%. This pressure is expected to continue as the share of low-margin AI hardware in total sales increases.

Supply Chain and Cost Pressures

Another challenge facing Dell is the increase in supply chain costs. Rising memory and processor prices are making it difficult for the company to profitably fulfill its current orders. Evercore analysts note that Dell's computing growth is limited more by component availability than by customer demand. Bottlenecks extend beyond memory to include CPUs and select optical components.

Analyst Opinions

Analysts are generally positive about Dell stock. The average target price is $519-$529. JPMorgan anticipates Dell may revise its revenue forecast upwards again. Evercore ISI added Dell to its pre-earnings "tactical superiority" list.

Morgan Stanley, however, is more cautious. Analyst Erik Woodring maintains his target price of $434, noting that Dell faces a challenging short-term outlook due to high expectations and valuations.

Key Points to Focus On in the Earnings Report

Investors will focus on the following key points after the earnings report:

• AI server orders and backlog
• Infrastructure solutions group revenue growth and margins
• Management's forecast revisions for the remainder of the year
• Comments on the impact of supply chain costs on profitability

The stock's year-to-date rise indicates that the market has largely priced in Dell's AI transformation. Therefore, simply meeting expectations may not be enough. Strong signals of sustainable growth and margin improvement will be crucial for the rally to continue.

This information is not investment advice. Conduct your own research.

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