Dell's AI Server Revenue Surges as Gross Margins Drop 26%

Dell rides AI wave while margins compress

Dell Technologies has emerged as a major beneficiary of the AI infrastructure buildout, supplying Nvidia-based servers, racks, and cooling systems to customers including CoreWeave and xAI. The company exceeded revenue expectations last month, and CEO Michael Dell's net worth reached $217 billion, making him the world's fifth-richest person, according to Fortune.

But beneath the headline growth lies a significant shift in Dell's business economics. The company's gross margin has dropped 26% since it first reported AI-optimized server revenue at the end of February 2025, even as AI products now generate 10 times the revenue of its traditional laptop and computer business.

In its most recent earnings call, Dell reported an 18.1% gross margin, with AI products now representing 37% of total revenue. Company executives acknowledged that AI servers are driving the lower margin rate compared to Dell's traditional product lines.

Why it matters

Dell's margin compression illustrates a broader tension in the AI infrastructure market: explosive demand doesn't automatically translate to proportional profitability. As hardware suppliers compete to capture AI buildout spending, they may be accepting thinner margins to maintain market position—a trade-off that works only if volume growth continues. The pattern also reflects Nvidia's dominant position in capturing value across the AI hardware stack.

Analyst perspectives split on sustainability

Aswath Damodaran, a New York University finance professor known as "the dean of valuation," told Fortune the trend signals "a changing business model." He noted that lower gross margins indicate worse unit economics that must be factored into Dell's long-term profitability story if the shift proves permanent.

Despite margin concerns, 18 analysts maintain buy ratings on Dell stock. James Fish, senior research analyst at Piper Sandler covering digital infrastructure, argued that compressed gross margins only threaten profitability if growth stops adding gross profit dollars—something he doesn't see happening at Dell currently. "It becomes a problem if it becomes that we're really not adding to the bottom line at all," Fish told Fortune, though he acknowledged the margin situation remains "one of the topics being debated."

A Dell spokesperson told Fortune the company's AI business "has grown on top of a very strong core business" and that Dell aims "to maintain gross margin rate stability in each of our lines of business." The company had previously informed investors in February 2025 to expect AI servers would decrease the margin rate.

Industry-wide pattern emerges

Dell isn't alone in facing this dynamic. Hewlett-Packard Enterprise has similarly seen AI server demand boost revenue while pressuring gross margins. Cisco has experienced product margin compression from sales mix and higher memory costs. The pattern demonstrates that strong hardware demand can come with profitability trade-offs—a reality that led IBM to exit the PC business in the early 2000s and later abandon hardware almost entirely in favor of high-margin software.

Fish expects continued percentage pressure on Dell's margin line "over the next few years" due to the product mix shift toward AI servers.

These details were first reported by Fortune.