Michael Dell is having a banner year.
His eponymous company is a key supplier in the data center buildout, selling Nvidia-based servers, racks, cooling and support to CoreWeave and xAI, while working with Nvidia, Google and OpenAI on systems that companies can use to run advanced software. Dell blew past revenue expectations last month, and Michael Dell’s net worth skyrocketed to $217 billion off the back of his company’s surging stock price, making him the fifth-richest person in the world..
But there’s a quieter story beneath the revenue growth: Dell’s gross margin dropped by 26% since the company first reported AI optimized server revenue at the end of February 2025, even as AI now brings in 10 times the revenue of laptops and computers.
The company acknowledged in its most recent earnings call that AI servers drove the 18.1% gross margin now that AI makes up 37% of Dell’s total revenue, suggesting that AI-optimized servers have lower gross margins than Dell’s traditional products. Analysts have been debating whether Dell selling more AI servers will lead to a durable source of profit or whether Dell is taking on a much bigger but lower-margin role as the company that packages expensive Nvidia-based systems for the AI buildout.
“Not everything is a red flag, but it is a sign of a changing business model,” Aswath Damodaran, a New York University Stern School of Business finance professor so revered for his equity analysis that he’s been nicknamed “the dean of valuation,” told Fortune over email. “Lower gross margins indicate worse unit economics, and to the extent that this is not temporary, it has to be built into Dell’s continuing profitability story.”
Eighteen analysts on the Street have buy ratings on the stock, nevertheless. One gave Fortune a bull case on why this trajectory is sustainable.
James Fish, a senior research analyst at Piper Sandler covering digital infrastructure, told Fortune that a hit to gross margin only drags down profitability if the growth stops adding gross profit dollars. He doesn’t see that happening with Dell right now, he added, even if its partner Nvidia captures more profit in the space.
“It becomes a problem if it becomes that we’re really not adding to the bottom line at all,” Fish said, but he noted the compressed gross margin situation is “one of the topics being debated” amid surging growth.
A Dell spokesperson told Fortune that its AI business “has grown on top of a very strong core business” and that the company’s goal is “to maintain gross margin rate stability in each of our lines of business.” Dell previously told investors in February 2025 that it expected AI servers to decrease the margin rate.
Dell is not the first tech hardware company to face margin pressure.
Hewlett-Packard Enterprise has also seen AI server demand boost revenue while weighing on gross margins, and Cisco has also seen its product margins squeezed by sales mix and higher memory costs, showing that strong hardware demand can still come with a profit tradeoff. Alternatively, IBM left behind the PC business in the early 2000s, later abandoning hardware almost entirely to focus on high-margin software instead.
“I think over the next few years you do have some pressure on that line from a percentage perspective because of this mixed shift,” Fish said.
This story was originally featured on Fortune.com
