Dell shares slump as heavy AI investments expected to dent margin

(Reuters) -Dell Technologies shares tumbled about 18% on Friday, as the PC and server maker expects sizeable AI investments to dent its quarterly profit.

Dell is on track to lose more than $21 billion in market value, if losses hold. The stock has risen more than 80% so far this year.

Companies, including Dell, have been investing heavily in pricey hardware to build-out advanced servers with the ability to process complex artificial intelligence tasks as more businesses rush to adopt the technology.

High costs linked with in-demand AI servers are also expected to hurt the company’s annual margin.

The Round Rock, Texas-based company expects adjusted gross margin rate to decline about 150 basis points in fiscal 2025. It forecast adjusted profit per share of $1.65, plus or minus 10 cents, for the second quarter, versus LSEG estimates of $1.84 at the time Dell reported results on Thursday.

“AI-server sales continue to contribute only a small percentage to the firm’s top line and are margin-dilutive,” Morningstar analysts wrote in a note.

While shipments of the company’s AI-optimized servers more than doubled to $1.7 billion in the first quarter, they represented less than 7% of the total revenue.

“The market is reining in unrealistic expectations for Dell’s ability to benefit from AI spending,” Morningstar analysts said.

Revenue from the company’s mainstay client solutions group, which includes its personal computer business, was flat, with the consumer sub-segment down 15%.

Dell has turned to pricing its models competitively in the consumer PC segment as the PC market emerges from a years-long slump.

“PC business has been in a downcycle for two years and it’s beginning to stabilize and look for growth,” said Chief Operating Officer Jeffrey Clarke on a post-earnings call on Thursday.

“The strong promotions that we saw through the holiday season continued into Q1.”

(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Shilpi Majumdar)