Dell Technologies (DELL) is set to report its Q3 results next week, on November 25, amid very mixed market sentiment. Over the past couple of years, the legacy PC seller has been a major beneficiary of the AI boom, with strong demand for its AI servers. It is no secret that AI servers are a low-margin business for integrators like Dell, yet the market bought into the idea that if Dell could scale AI server volumes and grow its top line quickly, margin expansion through operating leverage would eventually follow.
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The issue is that in recent quarters, Dell has failed to deliver this validation. The company hasn’t been able to turn strong top-line growth into meaningful margin improvement, even as valuations have been aggressively re-rated upward over the last couple of years.
As a result, Dell enters FQ3 needing to prove to the market that its role in the AI cycle goes beyond capturing volume. The company must demonstrate that it can convert demand into profitability, stabilize its mix, and outline a credible path toward margin expansion.
Based on annual guidance and the rising cost structure of key AI server components, I expect Dell’s markup to continue shrinking as the AI mix grows, which is clearly bearish. With that in mind, I see a higher likelihood of underperformance in the short- to medium-term, and I believe a Sell rating is warranted at this stage.
Dell’s AI Boom Isn’t Enough When You’re Just the Integrator
Dell’s post–FQ2 performance brought a 23% rally that lasted exactly two months—until the stock flipped into a sharp downward spiral.
Rewinding a bit, in the July quarter, Dell needed to calm market fears about margin erosion. Even though demand and backlog for AI servers remain incredibly high, Dell is stuck in the hardware integration layer (OEM/servers), while the actual “brain” of the system—GPUs and key software—belongs to NVIDIA and other chip suppliers. And that’s the fundamental difference—who owns the IP (intellectual property), who sets the price, and who can be replaced in the value chain. Spoiler: that’s not Dell.
A typical AI server has 60–70% of its cost tied to the GPU (Nvidia (NVDA)), another ~15% to the CPU (Intel (INTC)/AMD (AMD)), and the rest split across memory (DRAM, HBM, SSD), networking, power supply, and metal. What’s left for Dell is basically just the integrator’s markup—putting the company in a position with little pricing power.
As a result, over the last three quarters, Dell has found itself in a pure price-taker scenario, which forced its margins down. Gross margins compressed from 23.7% in FY25 Q4 to 21.1% in FY26 Q1 and then to 18.3% in FY26 Q2. Dell has been cutting OpEx aggressively—especially in FQ1, dropping from 16% to 12.3% of revenue QoQ—but this also reinforces that the mix is “dragging” operating results. Operating margins are now at 6%, a signal of structurally dilutive profitability.
Whenever gross margins collapse while OpEx is being trimmed aggressively, it doesn’t read as true efficiency. It reads as a defensive move to protect earnings.
Margin Problem Overshadows Solid Q3 Growth Outlook
For FQ3, Dell guided the market to expect revenues between $26.5 billion and $27.5 billion, which would represent roughly 11% year-over-year growth at the midpoint—an improvement over the 9% growth delivered in the same period last year.
Management also expects the ISG (servers) segment to grow in the low-20% range, while the CSG (consumer) business should expand in the mid-single digits.
However, the real concern isn’t the top line—it’s the margins. And management hasn’t given any indication of an “instant turnaround” in FQ3 or the following quarters. Reading between the lines signals an ongoing headwind.
In fact, the FQ2 guidance was heavily bearish for margins. Dell is projecting operating income of $9.2–$9.6 billion for FY2026, which implies an operating margin of ~8.75%. Considering that FY25 operating margins came in at 8.9%, up only 0.2 percentage points from FY24 and 0.3 points from FY23, the FY26 outlook doesn’t suggest any structural margin expansion—even with record AI server shipments and total revenue guided to reach an all-time high. In short, Dell doesn’t appear set to expand margins, and I don’t see a Q3 turnaround as a realistic outcome.
AI Re-Rating Is at Risk as Margin Expansion Fades
On the valuation side, at first glance, Dell still looks reasonably cheap, trading at around 18x earnings, a multiple not too far from the broader tech hardware OEM average.
But Morgan Stanley’s (MS) bearish view—which led to its recent downgrade—highlights a key issue. Since the March 2023 bottom, Dell has re-rated by roughly 7x and has outperformed the market by nearly 200 points. A move of that size usually sets the stage for multiple compressions if the expected margin expansion does not show up.
And in my view, there are far more reasons to believe margins won’t expand in the medium term than reasons to believe they will. That runs directly against the “AI beneficiary” narrative that helped drive Dell’s re-rating over the last couple of years.
Is DELL a Buy, Hold, or Sell?
Analyst sentiment on DELL remains mostly bullish, but some caution is creeping in. Over the last three months, the stock received 17 ratings—12 are Buy, four are Hold, and only one is Sell. The average stock price target is $168.67, suggesting a potential 40% upside from current levels.
Dell Must Convert AI Growth Into Better Margins
Dell continues to struggle to demonstrate that the AI cycle is benefiting the company in the way the market had anticipated. I expect FQ3 results to again reveal pressured gross margins and soft operating margins, despite ongoing efforts to reduce OpEx.
An unfavorable product mix is likely to persist through the second half of 2025, reinforcing the concern that strong demand does not necessarily translate into strong profitability. This dynamic materially weakens the bull case and threatens the broader re-rating narrative that has supported the stock.
Given these headwinds—and mounting pressure across the tech hardware sector—I expect Dell to underperform in the short- to medium-term. I maintain a Sell rating heading into next week’s earnings call.