Dell Technologies (DELL) has regained favor with investors in recent months after a period of skepticism earlier this year, as the market digests the implications of its AI-optimized server business. Since April of this year, the stock has staged a determined recovery from lows below $70 per share; meanwhile, Dell’s firm order backlog and accelerating demand are clear, and margins remain a key point of scrutiny.
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As market analysts expect Dell’s fiscal Q2 earnings to be published this Thursday, August 28th, the company faces a dual challenge: to consistently beat its guidance but also reassure the market that profitability can keep pace with its ambitious AI expansion, as rising AI server volumes begin to dilute fixed production and supply chain costs.
Trading at a discount that doesn’t fully reflect its operational moat in AI infrastructure, built on scale, end-to-end solutions, and strong customer relationships, I view Dell as a Buy, even if short-term volatility in operating margins over Q2 and the coming quarters may create some intermittent market volatility.
Strong Backlog Shows Dell’s AI Traction
After hitting a peak of pessimism in April, Dell shares have rebounded strongly over the past few months, primarily driven by the perception that its AI server business is gaining real momentum—especially after worries in previous quarters about falling margins due to the high cost of Nvidia (NVDA) Blackwell GPUs used in AI servers.
Dell’s Fiscal Q1 results, released at the end of May, confirmed this positive view on AI-optimized servers. Orders came in at $12.1 billion, with a backlog of $14.4 billion—exceptionally strong compared to prior quarters, which ranged between $1.5 billion and $3.6 billion.
According to Dell, the Q1 spike reflects large multi-quarter orders from hyperscalers—cloud providers, social media giants, and AI labs—locking in capacity ahead of next-gen GPU rollouts (Blackwell). Many data center customers had held back purchases at the end of Fiscal 2025, anticipating that Nvidia’s Blackwell architecture would replace Hopper this year.
The result was a “lumpiness” effect (uneven timing of orders and shipments), with Q4 shipments being weak at just $2.1 billion, followed by a wave of new orders as supply clarity improved. Q1 shipments remained low at $1.8 billion, highlighting that demand is far higher than immediate delivery capacity.
DELL Becomes a Price Taker in a High-Stakes AI Market
In theory, a high backlog and demand well above capacity might suggest pricing power, which usually translates into higher margins. But in Dell’s case, the story is a bit more nuanced.
The “brain” of the server—the GPU—has high margins, but that value goes to Nvidia, not Dell. As a system integrator, Dell captures relatively low margins on the hardware. This puts the company in a price-taker position since it can’t pass on much cost because customers know the premium is in the chip, not the server. In other words, Dell’s role is integration, not innovation in core IP (intellectual property).
Competition makes this even trickier. Supermicro (SMCI) has gained significant market share in AI servers over the past year by offering more affordable, customized solutions, while HPE (HPE) and Lenovo (LNVGY) are pushing prices down to extract extra value from deals.
This has been Dell’s Achilles’ heel. Nvidia achieves gross margins above 70%, but Dell’s ISG (server business) margins are only 10–12%. In Q1, Dell’s ISG operating margin stood at 9.7%—up 170 bps year-over-year but down sharply from 18% in Fiscal Q4. Margins are still volatile quarter to quarter, and growth in AI servers may continue to pressure them because these contracts are heavy on hardware costs (Nvidia GPUs) and light on Dell’s own IP.
That said, even considering these profitability concerns, Dell still looks undervalued. It trades at a 15.4x price-to-earnings ratio, well below the industry average of 22x. Given its massive AI server backlog, enormous capacity for scale, and the fact that it sells complete AI packages—including storage and IP solutions like PowerStore and PowerScale—its valuation appears somewhat mispriced.
What to Expect from Dell This Week
As investors await Dell’s Q2 earnings report, the market expects results roughly in line with the midpoint of the company’s guidance—EPS of $2.29 (up 21% year-over-year) and revenue of $29 billion (up 16.5% year-over-year).
However, I don’t think a simple beat across the board or a modest annual guidance raise will be enough to spark a truly bullish reaction. Dell’s AI share is substantial in revenue terms, but not so much in profit per unit, so I expect ISG margins to dominate the conversation.
Management has guided that it expects to ship an additional $7 billion in AI servers in Fiscal 2026, on top of the $1.8 billion already delivered. That suggests Q2 shipments should accelerate, potentially surpassing Q1. But the trend remains that faster AI growth will continue to pull the mix down, putting short-term pressure on margins. There may be some relief from Storage, with PowerStore and Dell’s IP storage growing in double digits and carrying fatter margins. Still, it’s unlikely to fully offset ISG’s operating margins returning to the 18% seen in Q4 2025.
In short, I would expect ISG’s operating margins in the 9–11% range—slightly better than Q1—but without meaningful expansion until Dell demonstrates that it can gain scale in AI servers to dilute fixed costs, improve the mix with more IP storage, and, equally importantly, capture more value in services and integrated solutions.
What is DELL’s 12-Month Price Target?
The consensus among Wall Street analysts on Dell is moderately bullish. Out of 15 experts covering the stock, 11 are bullish while the remaining four are neutral. Notably, not a single analyst is bearish on DELL stock right now. DELL’s average stock price target is $143.67, implying a potential upside of almost 10% over the coming 12 months.
Upside in Sight Amid Margin Pressure
Dell has enjoyed strong bullish momentum heading into its Q2 earnings, arriving with somewhat conservative expectations that leave room for a potential beat across the board—even without any major surprises.
While Dell often exceeds revenue expectations by capitalizing on unprecedented demand for AI-optimized servers, margins remain the main point of caution. I expect them to stay under pressure in the short term, though with some sequential improvement. If Dell can show signs of a more balanced mix, and that rising AI server volumes are beginning to dilute fixed production and supply chain costs, this could be the key signal to sustain its bull run.
Given the valuation asymmetry—Dell trades at a notable discount versus peers despite a defensible moat in AI infrastructure—I rate Dell stock as a Buy for the long term, even if short-term margin volatility triggers occasional corrections.