Dell lifts annual forecasts on AI server sales boom

Dell Technologies raised its full-year revenue and profit forecasts, citing robust demand for its AI-optimized servers, now projecting $20 billion in FY26 revenue from this segment. While second-quarter results surpassed estimates, the company's shares declined in extended trading due to a lower-than-expected third-quarter profit outlook and a miss on gross margin, signaling persistent margin pressures despite strong AI server backlog and orders.

Analysis

Dell Technologies has significantly raised its full-year guidance, now forecasting annual revenue between $105 billion and $109 billion and adjusted EPS of $9.55, driven by surging demand for its artificial intelligence servers. The company's AI segment shows remarkable momentum, with the fiscal 2026 AI server revenue forecast increased to $20 billion, supported by $5.6 billion in new AI orders and a total backlog of $11.7 billion in the second quarter. This top-line strength was evident in Q2 results, where revenue of $29.78 billion and adjusted EPS of $2.32 both surpassed analyst estimates, and the Infrastructure Solutions Group revenue grew 44%. However, this positive outlook is tempered by significant profitability concerns, which triggered an approximate 5% drop in after-hours trading. The company's third-quarter adjusted profit forecast of $2.45 per share fell short of the $2.55 consensus. This weakness is rooted in margin pressure, as the Q2 adjusted gross margin rate fell to 18.7%, missing estimates of 19.6%, attributed to the high costs and competitive landscape of the AI server market. A potential secondary catalyst exists in the Client Solutions Group, which grew 1%, as a strong PC refresh cycle is anticipated with the end of Microsoft's Windows 10 support in October.

Key Decisions for Investors

• Investors should weigh the robust AI-driven top-line growth and $11.7 billion server backlog against the clear evidence of margin compression, as the weaker-than-expected Q3 profit guidance suggests profitability from the AI boom is not a given.
• Monitor Dell's adjusted gross margin rate in subsequent quarters as the primary indicator of its ability to manage high input costs and competition within the AI server market.
• Factor in the potential upside from the non-AI Client Solutions Group, as the upcoming end of Windows 10 support is expected to trigger a significant PC refresh cycle, which could provide a separate growth driver.