To The Moon

Global IT infrastructure giant $Dell Technologies Inc.(DELL)$ has released its financial results for the third quarter of fiscal year 2026. Overall, driven by surging demand for AI servers, the company delivered another record-breaking performance: revenue, EPS, and AI order volume all hit all-time highs. However, behind these impressive figures, uncertainties stemming from rising supply chain costs and overheated demand have begun to surface.

Revenue hits record high, driven by AI but with deepening structural dependence

Total revenue for the quarter reached $27 billion, marking an 11% year-over-year increase and setting a new Q3 record. Infrastructure Solutions Group (ISG) delivered particularly strong performance, with revenue hitting $14.1 billion—a significant 24% year-over-year surge. Server and networking revenue surged to $10.1 billion, up 37% year-over-year. From a structural perspective, AI server orders reached $12.3 billion, with cumulative orders exceeding $30 billion for the year, becoming the strongest growth driver.

However, we note that revenue growth relies heavily on AI server-related businesses, while traditional business momentum remains relatively weak. Management has repeatedly emphasized that "AI demand is way ahead of supply," but also mentioned widespread increases in component costs, suggesting this structural growth may not be entirely healthy.

Gross margin improved driven by AI business, but cost pressures are evident.

Gross profit for the quarter reached $5.7 billion, a 4% year-over-year increase, with a gross margin of 21.1%. Management attributed the improvement primarily to a doubling of AI server shipments year-over-year and enhanced profitability in the storage business—contrasting with the weaker AI mix highlighted in the previous quarter, reflecting Dell's improved management of its cost structure.

However, management acknowledged in the Q&A session that costs for DRAM, NAND, hard drives, chips, and other products are rising across the board, stating that "the cost basis is going up across all products." This suggests that the improvement in gross margins may not be sustainable going forward and could even face pressure due to supply chain constraints.

CSG (PC business) shows a modest recovery but remains structurally unstable, with consumer demand still weak.

CSG reported quarterly revenue of $12.5 billion, up 3% year-over-year, with commercial segment revenue increasing 5% while consumer segment revenue declined 7%. Overall operating margin remained at approximately 6%, within normal levels.

We believe the PC market's rebound remains driven by supply chain recovery rather than genuine demand recovery. Management noted that Windows 11 upgrades are "not yet complete," indicating future replacement opportunities. However, this appears more like catch-up demand than a long-term trend. Compared to the explosive growth in AI business, CSG's recovery has been relatively sluggish, with structural divergence becoming increasingly pronounced.

Operating profit grew at a double-digit rate, with cost control showing results, though its sustainability remains to be seen.

Operating expenses for the quarter totaled $3.2 billion, a 2% decrease year over year, with the expense ratio declining to 11.8%. Against the backdrop of revenue growth, the company achieved operating profit of $2.5 billion, an 11% increase year over year, with the operating profit margin rising to 9.3%.

Cost-side convergence has clearly provided a leverage effect for profit growth. However, given the undeniable rise in supply chain costs, we anticipate that the sustainability of expense ratio improvements remains to be seen. Particularly against the backdrop of rapid AI server order fulfillment, supply chain resilience will ultimately determine future profit performance.

AI Servers: Orders, Shipments, and Backlogs Hit Record Highs, but Supply Chain Under Pressure

This quarter, AI server orders reached $12.3 billion, shipments totaled $5.6 billion, and backlog hit a record $18.4 billion. Management emphasized that AI racks can be deployed within "24 to 36 hours," with utilization rates exceeding 99%, and described its supply chain advantages as "rapid scale" and "differentiation."

However, when pressed by multiple analysts on supply chain costs and pricing strategies, management acknowledged that "there's not going to be enough parts." We believe AI server growth remains promising in the coming quarters, but supply chain constraints and upstream price hikes will be key variables.

Cash flow remains robust, share buybacks continue unabated, and capital expenditure strategy remains aggressive.

Operating cash flow for the quarter was $1.2 billion, with cash and investments totaling $11.3 billion. The company repurchased 8.9 million shares at an average price of $140 per share, returning a total of $1.6 billion in capital.

It is evident that management remains confident in the stock price. However, we believe that amid the ongoing acceleration of AI investment cycles, whether the pace of share buybacks requires adjustment may become a key focus for the market going forward.

Management Guidance: Q4 Acceleration Resumes, AI Shipment Forecasts Significantly Raised

For Q4, the company provided a revenue range of $31.0–$32.0 billion, with a midpoint representing a +32% year-over-year increase—significantly higher than Q3's +11% growth.

• ISG + CSG projected to increase by 34% year-over-year

• Among these, ISG forecasts a growth rate in the mid-60s.

• AI server shipments are projected to reach $9.4 billion.

• The company has raised its full-year AI shipment forecast from $20 billion in Q2 to $25 billion.

EPS guidance is in the range of $3.50, representing a 31% year-over-year increase. Full-year EPS is projected to reach $9.92, reflecting a 22% year-over-year growth.

Overall, the guidance is markedly positive, with management sounding significantly more confident, emphasizing the substantial AI backlog and gradually improving supply.

Overall, Dell remains a cyclical winner driven by AI, but valuation should be cautious amid supply chain and cost pressures.

Our position is:

1. Growth structure is heavily reliant on AI, while traditional business recovery remains limited.

   ISG's high growth coupled with a surge in AI orders makes the company appear to be growing steadily, but CSG and traditional server demand remain weak.

2. The improvement in gross margin is sustainable in the short term, but its medium-to-long-term trajectory depends on changes in supply chain costs.

   If the upward price trend persists, it will erode the potential for profit improvement.

3. The AI backlog remains substantial, with demand showing resilience, but supply-side bottlenecks have emerged.

   Clarke's rare emphasis on "not enough parts" indicates that supply has become the core constraint.

4. From a valuation perspective, the market has already priced in the AI boom, but may be underestimating supply chain risks.

   Based on the closing price of approximately $146 on November 25, FY26e EPS of $9.92 corresponds to a PE ratio of about 14.7x. For FY27e, using management's May guidance framework (mid-single-digit revenue CAGR, 20%+ EPS CAGR) as a conservative estimate, EPS would be around $12, corresponding to a PE ratio below 12.5x. Compared to Super Micro (SMCI) at over 40x and Pure Storage at over 30x, Dell's AI purity is slightly lower, but it holds comprehensive advantages in scale, supply chain barriers, and customer diversity (hyperscale cloud providers + sovereign clouds + enterprises).

Overall, Dell is in a strong position within the AI cycle, with its supply chain execution and engineering delivery speed forming industry barriers. However, precisely because its rapid growth stems from the single AI segment, the company's future performance will be more susceptible to supply chain and cost fluctuations. Investors should recognize both the growth highlights and the underlying cost pressures.