Dell predicts a decline in profit margins in fiscal 2026, and the rise in AI server costs will become the main reason

In a competitive market environment, Dell released its fiscal 2026 performance outlook this Thursday, expecting its adjusted gross margin to decline. This is mainly due to the rising cost of producing artificial intelligence (AI) servers. In addition, Dell's personal computer business also performed poorly against the backdrop of weak demand.

The company, based in Boulder, Texas, fell about 2% in after-hours trading, even though it also announced a $10 billion increase in its share buyback program. Dell's AI servers are equipped with powerful Nvidia chips designed to meet the high computing needs of training large language models, such as ChatGPT, for example. Dell expects AI server revenue to reach $15 billion, a 53% increase from $98 billion as of January 31. However, high production costs are eroding the company's profit margin, with adjusted annual gross margin expected to drop by about 100 basis points.

In addition, Dell also said that its AI server order backlog has reached about $9 billion and has reached a cooperation agreement with Elon Musk's xAI startup. Despite cost pressure, Dell expects adjusted earnings per share to be $9.30, surpassing analysts' expectations of $9.23. The company expects median annual revenue to be $103 billion, consistent with market expectations.

However, Dell also pays attention to the risk that the broad trade tariffs imposed by the United States on Chinese goods may trigger price increases. Dell said it is reviewing the tariff executive order to assess its impact on the company’s operations and customers, highlighting that the announcements have not yet affected its pricing strategy. "Any tariffs that we cannot alleviate will be considered input costs. As our input costs rise, prices may need to be adjusted."

According to the latest research by International Data Corporation (IDC), traditional PC market forecasts for 2025 and beyond are expected to be further reduced by the impact of US tariffs and weak market sentiment.

In the fourth quarter ended January 31, Dell's revenue was $23.93 billion, under the market's expectations of $24.56 billion; adjusted earnings per share were $2.68, surpassing the $2.53 forecast. Dell's infrastructure solutions division revenue grew 22% to $11.35 billion, while client solutions division revenue grew 1% to $11.88 billion.