Dell Technologies (NYSE:DELL) shares experienced a sharp decline of approximately 18% on Friday as the PC and server manufacturer anticipates significant investments in artificial intelligence (AI) to impact its quarterly profits.
The Round Rock, Texas-based company is bracing for a substantial reduction in quarterly profit due to sizable AI investments, causing a potential loss of over $21 billion in market value. Despite an impressive 80% year-to-date increase in stock value, Dell faces challenges as it navigates the evolving landscape of AI technology adoption.
Investments in advanced servers tailored for complex AI tasks have driven up costs for Dell and other companies, with high expenses associated with building out AI infrastructure contributing to margin pressures. Dell expects its adjusted gross margin rate to decrease by approximately 150 basis points in fiscal 2025, reflecting the impact of AI-related investments on profitability.
While shipments of AI-optimized servers surged in the first quarter, reaching $1.7 billion, they accounted for less than 7% of total revenue. Morningstar analysts caution that AI-server sales remain margin-dilutive and contribute only a small percentage to Dell’s top line.
Moreover, revenue from Dell’s client solutions group, encompassing its personal computer business, remained flat, with a 15% decline in the consumer sub-segment. Dell has responded by competitively pricing its consumer PCs to stimulate demand, particularly as the PC market emerges from a prolonged downturn.
Chief Operating Officer Jeffrey Clarke acknowledged the challenges in the PC business, noting signs of stabilization and potential growth. Despite ongoing promotions and strong holiday sales, Dell faces headwinds in a market where AI investments may not yield immediate substantial returns.
As Dell grapples with the dual pressures of heavy AI investments and a competitive PC market, investors are recalibrating their expectations, emphasizing the need for a balanced approach to ensure sustained growth and profitability in the long term.
Featured Image: Megapixl
