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Dell’s AI Momentum Stumbles Amid Blackwell Transition and Slow PC Upgrades

Emilia Wright | November 27, 2024

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Dell’s AI Boost Derailed by Blackwell Transition and Slower Move to AI PCs

Dell Technologies Inc. experienced a significant setback in its recent surge in artificial intelligence (AI) offerings, as the computer maker’s weaker forecast disappointed investors. The decline was largely attributed to a dual impact from the transition of AI products in both servers and PCs.

On Tuesday, shares of Dell (DELL) dropped by 11% in after-hours trading. This downturn marks a considerable reversal for a company whose stock had skyrocketed by 88% this year, establishing it as a prominent player in the AI-server sector. Despite reporting exceptional revenue growth of 58% in its fiscal third quarter for servers and networking, Dell projected revenues for the upcoming fiscal fourth quarter that fell short of market expectations.

Current Revenue Projections

Dell CFO Yvonne McGill communicated that she anticipates fourth-quarter revenues to be between $24 billion and $25 billion, compared to the consensus estimate of $25.6 billion from FactSet. McGill pointed out two key factors affecting this outlook: slow PC refresh cycles and unpredictable AI shipments.

“There are two elements. For PCs, it’s not a matter of whether the refresh will happen, but when. We’re witnessing that push to next year,” McGill stated. She also highlighted the uncertainty surrounding AI shipments, particularly linked to Nvidia Corp.’s transition to its new Blackwell chips.

PC Upgrades and Market Dynamics

Dell executives noted that the anticipated customer transition to new AI-enabled PCs is progressing slower than initially forecasted. This delay can be partly traced to organizational responses regarding the end-of-support timeline for Microsoft Corp.’s Windows 10, which expires in October 2025. While users can extend their security updates by paying an additional $30, this option may lead some consumers to postpone upgrades.

Industry partner Hewlett-Packard Inc. (HPQ) shared similar sentiments during their own earnings call. They concurred with forecasts suggesting that the PC market would grow by mid-single digits in 2025. The International Data Corporation (IDC) predicted a 4.3% growth in the PC sector in 2025, thanks to the Windows refresh cycle. IDC analyst Jitesh Ubrani commented, “While AI has become a buzzword recently, it hasn’t yet become a decisive factor for PC consumers.”

Dell’s AI-Server Backlog

On the AI server front, Dell reported a backlog of orders amounting to $4.5 billion, up from the previous quarter’s backlog of $3.8 billion. BofA Securities analyst Wamsi Mohan had anticipated that Dell’s backlog would reach around $4.45 billion. Despite projecting a decrease of 8% in AI-server revenue, citing $2.85 billion for the third quarter, Mohan acknowledged a potential for increased revenues if Dell could secure all necessary components.

The increase in backlog prompted one analyst to inquire whether the figure resulted from challenges faced by a competitor, likely hinting at accounting issues at Super Micro Computer Inc. (SMCI). In response, Dell’s Vice Chairman Jeff Clarke asserted, “We face tough challenges from competitors at every opportunity. However, we believe we possess a highly differentiated offering, which is why our pipeline continues to grow.”

Long-Term Prospects for AI

Despite the current challenges, Dell remains optimistic about the AI server market, projecting robust opportunities moving forward. The company reported shipping $2.9 billion in AI server products during the most recent quarter, indicating strong demand despite some obstacles.

As Dell navigates the complexities of product transitions and fluctuating upgrade cycles, investors and consumers alike will be watching closely to see how the tech giant adapts and responds to the evolving AI landscape. With a strong backlog and a commitment to innovation, Dell is poised to potentially reclaim its footing in the rapidly changing tech arena.