Source: Fortune
Summary
Dell Technologies has seen significant revenue growth due to its involvement in the AI buildout, with AI-optimized servers now making up 37% of its total revenue. However, the company’s gross margin has dropped by 26% since it first reported AI-optimized server revenue in February 2025. Analysts are debating whether Dell’s shift towards AI servers will lead to a durable source of profit or lower-margin sales. Eighteen analysts have buy ratings on the stock, with some arguing that the growth in gross profit dollars will offset the hit to gross margin.
Our Reading
The numbers tell one story.
Dell’s AI business has grown rapidly, but at the cost of lower gross margins. The company’s goal is to maintain gross margin rate stability in each of its lines of business. However, analysts are concerned that the shift towards AI servers could lead to a more permanent hit to profitability. Aswath Damodaran, a New York University finance professor, notes that lower gross margins indicate worse unit economics. James Fish, a senior research analyst at Piper Sandler, argues that the growth in gross profit dollars will offset the hit to gross margin, but acknowledges that the compressed gross margin situation is a topic of debate. Dell is not the first tech hardware company to face margin pressure, with Hewlett-Packard Enterprise and Cisco also seeing AI server demand weigh on gross margins.
The strategy enters a familiar phase.
Author: Evan Null
