Dell's AI Server Orders Reached $61 Billion in the Second Quarter, and the Pipeline Keeps Growing
Key Points
Revenue grew nearly 60% in the second quarter, driven by the AI infrastructure spending.
Infrastructure segment operating margins came in at a healthy 15% despite rising memory costs.
The stock is up nearly 300% this year and now trades at around 18 times forward earnings.
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Dell Technologies (NYSE: DELL) booked $61 billion in artificial intelligence (AI) server orders during the second quarter (Q2), up from $24 billion in Q1. The AI build-out continues to fuel its pipeline, which COO Jeff Clarke says "remains multiples of our backlog."
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AI server revenue grew 100% to $16.4 billion, and traditional servers and networking revenue rose 122% year over year. Total revenue climbed 58% to a record $47 billion, and the company now expects growth of around 70% for the full year.
Adjusted earnings per share of $7.04 came in well above analyst estimates of roughly $5, and management raised guidance to $25.50 for the year. Is this still an opportunity for investors?
Image source: Getty Images.
Two distinct sources of demand
Dell's results have been driven by high-volume, concentrated orders from "neoclouds," sovereign clients, and large enterprises. These customers are purchasing Dell's AI Factory, a package of servers, storage, and networking designed to run AI workloads in a customer's own data center. The AI backlog now stands at $95 billion, up from $51.3 billion last quarter.
At the same time, the company's traditional hardware business is generating the margin. Corporations are refreshing fleets to free room and power for AI. Dell's upcoming 18th-generation PowerEdge server can replace 12 to 14 older machines, driving efficiency gains for customers. This demand extends to storage, where Dell-branded platforms are gaining share and carry higher margins than AI servers.
Dell's competitive edge comes from integration and logistics. Enterprises are buying complete, tested systems, and some projects require "upwards of 50 unique designs," according to Clarke. The ability to deploy complex hardware at scale is what separates Dell from competitors focused on price.
Memory costs and margins
Rising memory costs have been a concern, but operating income for the infrastructure segment (ISG) grew 225% to $4.8 billion, and margins expanded 620 basis points to 15%. Management attributed the results primarily to the scale of its operations, which contributed over 400 basis points of margin improvement.
Still, investors should consider the nature of the business. Product revenue grew 72% in the quarter, while services revenue was flat at $5.9 billion. This highlights the hardware-heavy model that has historically resulted in a below-market multiple for Dell.
Shares are up 16% since the earnings report and now trade at roughly 18 times forward earnings. That's a premium to its five-year average of 10, which reflects a cyclical hardware business with little high-margin recurring revenue.
The premium is earned given the trajectory of earnings growth and the sheer scale and breadth of this cycle. For long-term investors, the duration will matter most. I think the stock is worth owning, but would wait for a pullback to deploy fresh capital. For now, management reports that the pipeline of new orders is still building.
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Bryan White has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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