Strong quarter masked by margin concerns
Dell Technologies reported record-breaking results for Q2 FY26, but shares fell 6% in early Friday trading as investors focused on margin pressure and a declining AI backlog. Total revenue reached $29.8 billion, up 19% year-on-year, beating expectations. Net income rose to $1.70 per share, a 38% jump, while non-GAAP EPS came in at $2.32, up 19%. Operating cash flow nearly doubled from a year earlier, climbing to $2.5 billion.
Despite the strong earnings beat and impressive cash generation, Dell’s non-GAAP gross margin dropped to 18.7%, down from 22.4% the previous year. The margin compression was largely driven by the scale-up of its AI server production — a lower-margin segment compared to traditional enterprise products.
AI servers take center stage
Dell’s AI-optimized server segment delivered a standout performance. The company shipped $8.2 billion in AI servers during Q2 alone, exceeding the $10 billion mark for the first half of the year — already higher than the full-year FY25 total. Dell has now raised its full-year FY26 AI server forecast to $20 billion.
Management emphasized its role in AI infrastructure delivery, highlighting Dell as the first to supply Nvidia’s cutting-edge GB300 NVL72 to CoreWeave in July. This move positions Dell as a major player in the AI hardware space, alongside names like Supermicro and HPE.
Backlog drop raises sustainability questions
However, the AI server backlog declined from $14.4 billion in Q1 to $11.7 billion in Q2. While this figure remains high, the sequential drop sparked concerns about whether the breakneck pace of orders is sustainable. Investors questioned whether Dell’s current momentum may be peaking, especially with margins under pressure as AI shipments ramp up.
Despite the pullback, Dell’s leadership expressed confidence in its pipeline and reiterated strong demand trends. The company continues investing heavily to maintain AI server leadership amid intensifying competition and high hardware costs.
Mixed valuation signals
Analyst sentiment remains cautiously optimistic. The average one-year price target across 20 analysts sits at $143.07, implying a modest upside of 6.73% from the current price of $134.05. The high estimate reaches $180.00, while the low dips to $104.00.
In contrast, GuruFocus estimates Dell’s fair value at just $89.92, suggesting a potential downside of -32.92%. The divergence reflects uncertainty over margin trends, AI sustainability, and broader macroeconomic risks.
