Why Dell's stock is clawing back after a post-earnings decline

By Emily Bary

Analysts are upbeat about sovereign AI, PC positioning and the potential for margin improvement

Dell Technologies Inc.'s stock is continuing its ascent on Tuesday, though it remains about 15% off its all-time high achieved late last month when it reported earnings.

That last earnings report failed to live up to Wall Street's high expectations, particularly as it showcased how the artificial-intelligence server boom isn't helping margin rates.

"Today, AI servers are margin dollar accretive, but rate dilutive," BofA analyst Wamsi Mohan wrote Tuesday. That's because graphics processing units are a large component of Dell's (DELL) bill of materials. Still, Mohan is one of a handful of analysts expressing continued optimism about Dell's ability to improve margins going forward.

Following recent management meetings, he said Tuesday that Dell's margins "have runway to grow" thanks to contributions from services, consulting, support and related areas that "get deferred onto the balance sheet and are recognized over time."

See also: Dell's stock has slumped since earnings. Why BofA sees a 30% gain ahead.

Plus, with rising power costs, customers could prove more likely to upgrade their servers, especially since liquid-cooling options can improve the return on investment, Mohan said.

He's also encouraged by the potential embedded in sovereign AI, as countries look to up their game in artificial intelligence. "Sovereign AI represents another large future opportunity" and could come to rival or exceed the opportunity from serving tier-2 cloud providers, Mohan added.

Overall, he and his team "walked away confident in the multi-year opportunity related to AI" following the management meetings.

Dell's stock is up 7.6% in midday trading after rising 5.2% in Monday's session.

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Morgan Stanley analyst Erik Woodring took a similar upbeat view in the wake of management meetings. Those left him with "greater confidence in the path forward," Woodring wrote in a Monday report.

He has increased conviction that Dell's "recent AI server momentum and competitive positioning (with a focus on engineering capabilities) should sustain, if not accelerate." He also thinks that Dell is remedying "competitive shortfalls" in the storage business that should come to benefit growth there, and that the company's client solutions group, which includes personal computers, "is well positioned to outperform the market."

"In our view, these factors are likely to accelerate revenue and earnings revision momentum, and drive further multiple expansion over the next 12 months," Woodring said.

-Emily Bary

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06-18-24 1216ET

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