Shares of Dell Technologies Inc. cratered in extended trading today as analysts raised concerns over the impact of rising demand for artificial intelligence servers on the company’s overall profitability.

Dell officials said they expect the company’s gross margin to fall by roughly 150 basis points in fiscal 2025, as a result of the increased mix of AI servers, inflationary input costs and a more competitive environment.

Shares of Dell, which had already fallen more than 5% in the regular trading session in anticipation of its first-quarter earnings results, plummeted more than 17% after-hours.

The enormous drop followed a decent quarterly performance that saw Dell beat Wall Street’s expectations. For the first quarter, it reported earnings before certain costs such as stock compensation of $1.27 per share, just ahead of the analyst’s consensus estimate of $1.26, while revenue jumped 6%, to $22.24 billion, easily beating the $21.64 billion analyst target.

Dell said its server business delivered stellar results. Server sales fall within its Infrastructure Solutions Group, where saw sales rose 22% on an annual basis, to $9.2 billion. Within that segment, servers and networking accounted for $5.5 billion in sales, up 42%. The company said AI-optimized servers generated $2.6 billion of that, while its order backlog in that category grew 30%, to $3.8 billion.

The growth in AI server sales was not unexpected, as Dell has emerged as one of the top vendors in that category.  The company’s AI servers are in high demand as enterprises look to beef up their investments in generative artificial intelligence. At Nvidia Corp.’s GTC conference last month, Chief Executive Jensen Huang personally recommended Dell founder Michael Dell (pictured) as the man to talk to if anyone wants to buy his company’s newest graphics processing units.

Jeff Clarke, Dell’s vice chairman and chief operating officer, insisted that “no company is better positioned than Dell to bring AI to the enterprise.”

All told, Dell delivered $955 million in net income during the quarter, or $1.32 per diluted share, versus $578 million, or 79 cents, in the year-ago period. Overall sales during the quarter rose 6% on an annual basis.

However, the rise of AI servers seems to be having a negative impact on Dell’s profitability. The company revealed that its operating income for the period fell 14% from a year earlier, to $920 million. Dell officials did talk up the potential for its gross margins to recover toward the end of the fiscal year, though they said AI severs might also dilute the margin rate while helping to improve margins on a dollar basis.

Looking forward, Dell said it anticipates second-quarter revenue of between $23.5 billion and $24.5 billion, ahead of the Street’s forecast of $23.3 billion. For the full year, the company is projecting revenue of $93.5 billion to $97.5 billion, compared with the $94.6 billion consensus estimate.

Chief Financial Officer Yvonne McGill said on a call with analysts that the company fully expects the AI momentum to continue, adding that it will drive “incremental revenue growth for the year.”

Dell’s Client Solutions group, which includes personal computers and monitors, was a bit more disappointing, with revenue flat at just over $12 billion. That said, it did come out ahead of the analyst forecast of $11.7 billion. Within the segment, commercial revenue inched up 3%, to $10.2 billion.

Constellation Research Inc. analyst Holger Mueller said investors will likely welcome the company’s revenue growth, but are clearly concerned that both of its main divisions are less profitable than before, which shows that growth is coming at a price.

“Other effects outside of its core business made Dell’s profit surge nicely, but investors want to see a healthy and profitable core business on both the infrastructure and the client solutions side,” Mueller explained. “The good news is that Dell is becoming less dependent on storage and less dependent on its consumer business. These are good trends, and as infrastructure closes the gap with client solutions, it will give the company a better balance overall.”

Dave Vellante, Chief Analyst of SiliconANGLE sister division theCUBE Research, added that “AI servers get all the headlines but I’m watching Dell’s storage business. It has underperformed recently, and I’m expecting that to change in the back half of 2024. Storage margins are significantly higher than servers because Nvidia and other CPU providers take so much of the server bill of materials.”

Michael Dell stopped by theCUBE, SiliconANGLE Media’s mobile livestreaming event studio, during its coverage of the Dell Technologies World event earlier this month, when he discussed how his company is leading the AI revolution:

AI drives strong sales growth for NetApp

Dell isn’t the only data center hardware supplier to benefit from the rising interest in AI. NetApp Inc., which sells servers in addition to cloud-based data management services, also delivered strong results today, saying it’s benefiting from high demand for AI and enterprise refresh cycles.

The company said enterprises’ spending on cloud computing has been robust lately, as they look to upgrade their technology infrastructure in order to support their AI investments. With that increased spending, more companies are seeing a benefit in moving from on-premises servers to the cloud, where they can benefit from more cost-effective processes, NetApp said.

That helped NetApp to deliver revenue of $1.67 billion, up 17% from a year earlier, in its fiscal 2024 fourth quarter, just beating the Street’s consensus estimate of $1.66 billion. The company’s Hybrid Cloud segment, which accounts for the majority of its revenue these days, saw sales rise to $1.52 billion in the quarter.

NetApp delivered earnings of $1.80 per share, just ahead of the consensus estimate of $1.79, while its net income came to $291 million, compared with $245 million in the same period one year earlier.

NetApp said it’s expecting first quarter revenue of between $1.46 billion and $1.61 billion, with the midpoint of that range coming out ahead of the Street’s target of $1.52 billion. For the full year, the company is eyeing revenue of between $6.45 billion and $6.65 billion. The midpoint of that range of $6.55 billion, just above the analyst’s target of $6.53 billion.

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