The leading manufacturer of PCs and servers had record revenue in its Infrastructure Solutions division due to increasing AI demand.
Dell Technologies (NYSE:DELL) stock fell about 12% Wednesday after the company posted mixed results in its fiscal third quarter. But it could be a buying opportunity for investors, as increasing AI demand is providing a sturdy earnings tailwind.
Revenue jumped 10% year-over-year in the third quarter to $24.4 billion, but it fell short of consensus estimates of $24.7 billion.
Net income jumped 12% in the quarter to $1.1 billion, while earnings per share soared 16% to $1.58 per share. Adjusted earnings, which analysts track, came in at $2.15 per share, up 14% year-over-year. This easily topped estimates of $2.06 per share.
While the stock price was down due to the revenue miss, and a Q4 outlook that fell short of projections, the longer-term view for Dell looks much brighter, driven by high AI demand.
Record revenue in AI business
The fiscal Q3 earnings results for Dell were indeed mixed. One side of the company posted record revenue, while the other side recorded declining revenue.
The Infrastructure Solutions Group (ISG) — which includes its servers, storage, and networking businesses — reported record revenue in Q3. It generated $11.4 billion, up 34%, fueled by its AI-enabled servers and storage capabilities.
Within ISG, the company generated $7.4 billion in servers and networking revenue – a 58% spike, driven by high AI demand. Another $4 billion came from storage revenue – up 4%. ISG operating income skyrocketed 41% to $1.5 billion, or 13.3% of revenue. That’s up from 12.6% of revenue in the same quarter a year ago.
“AI is a robust opportunity for us with no signs of slowing down,” Jeff Clarke, COO at Dell, said in the earnings release. “Interest in our portfolio is at an all-time high, driving record AI server orders demand of $3.6 billion in Q3 and a pipeline that grew more than 50%, with growth across all customer types.”
A significant portion of the pipeline comes from NVIDIA and its new Blackwell chips, which will be integrated into Dell’s servers.
“We saw in Q3 a shift, a pretty rapid shift, of the orders moving toward our Blackwell designs; the specific one you called out, the GB200,” Clarke said on Dell’s Q3 earnings call. “That’s now on backlog, so the backlog in orders for the quarter, without giving a specific percentage, was a significant portion of the demand, and now is a significant portion of the backlog.”
While ISG outperformed, the Client Services Group (CSG) saw revenue decline 1% year-over-year to $12.1 billion, falling short of estimates. This represents the PC side of the business, as Dell remains one of the largest PC manufacturers in the world.
Revenue on the commercial side of CSG rose 3% to $10.1 billion, but the consumer division dropped 18% to $2 billion. Operating income for CSG was $694 million, down 25% year-over-year. Income was 5.7% of revenue, down from 7.5% in the same quarter a year ago.
Dell and NVIDIA are far from the only companies hoping that AI demand continues: AI lending platform Upstart (NASDAQ:UPST), for example, has achieved phenomenal recent stock price growth.
Outlook for Q4
In addition to the revenue miss, Dell offered Q4 revenue and earnings guidance that was slightly below expectations.
Dell anticipates revenue to be between $24 billion and $25 billion, or roughly 10% growth at the midpoint, the same as Q3. ISG revenue growth is expected to be in the mid-20% range, fueled by AI and traditional servers. Meanwhile, CSG revenue in Q4 is anticipated to rise in the low-single digits. Adjusted diluted EPS is targeted at $2.50 plus or minus $0.10 — up 14% at the midpoint.
While robust, the growth numbers were below consensus estimates of $25.57 for revenue and $2.65 billion for adjusted EPS.
Looking out beyond the next quarter, Dell should be in growth mode. It has $4.5 billion in AI backlog orders alone. In addition, its AI optimized server pipeline grew more than 50% in Q3 from the previous quarter.
That should provide strong revenue tailwinds for the next fiscal year. The company should also get a boost from its PC business, as many of its corporate clients have aging PCs and servers that are due for a refresh.
Analysts are generally bullish on Dell’s prospects. Dell stock has a consensus buy rating and a median price target of $154 per share. That would be about 24% higher than the current price.
Dell stock has gained a robust 61% year-to-date. However, the stock is still reasonably valued, even with the strong runup. It has a trailing P/E of 25 and a forward P/E of 14, both of which are below the index average – don’t be surprised if stock trading signals start flagging it.
