DELL's Margins Under Pressure: Will ISG Strength Drive a Rebound Ahead?

Dell Technologies DELL is suffering from a decline in gross margin, which contracted 80 basis points (bps) year over year to 21.6% in the first quarter of fiscal 2026. The dip was primarily driven by a more competitive pricing environment, particularly in the Client Solutions Group segment, and an unfavorable geographical mix within traditional servers.

However, Dell’s ISG (Infrastructure Solutions Group) segment played a key role in supporting overall gross margin performance. In the first quarter of fiscal 2026, ISG revenues grew 12% year over year to $10.3 billion, with servers and networking revenue reaching a record $6.3 billion, up 16% year over year. The company also saw robust demand for AI servers, which drove higher revenues and gross margin dollars. 

In the fiscal first quarter of 2026, Dell’s AI-optimized server momentum saw an increase of $12.1 billion in orders. The flagship PowerEdge XE9680 experienced strong demand, contributing to the momentum in the AI space. The company shipped $1.8 billion worth of AI servers in the fiscal first quarter, and the AI server backlog remained healthy at $14.4 billion.

Building on this momentum, Dell expects gross margin dollars to increase 10% quarter over quarter in the second quarter of fiscal 2026, driven by strong performance in ISG, particularly AI servers, and continued improvement in storage profitability. The company also expects to ship $7 billion worth of AI servers in the second quarter of fiscal 2026, which is expected to contribute significantly to gross margin growth.

DELL Faces Stiff Competition From HPE and SMCI

DELL is facing stiff competition in the server space against the likes of Hewlett Packard HPE and Super Micro Computers SMCI.

Hewlett Packard is benefiting from robust demand for its AI-optimized servers, leading to significant revenue growth in its server segment. The company’s multi-billion-dollar investment plan across expanding networking capabilities will diversify the business beyond the server and hardware storage markets, ultimately boosting margins in the long run.

Super Micro Computer is evolving from just a server and hardware vendor into a full IT solutions provider. Products like DCBBS (Data Center Building Block Solutions) bundle hardware, software, cooling, networking and support into complete systems. This strategy increases revenue per deal and improves margins. It also makes customers more likely to stay with Super Micro Computer for future upgrades.  

DELL’s Share Price Performance, Valuation and Estimates

DELL’s shares have gained 7.3% year to date, underperforming the broader Zacks Computer & Technology sector’s return of 8.4%.

DELL Stock Performance

DELL stock is trading at a significant discount, with a forward 12-month Price/Sales of 12.36X compared with the Computer & Technology sector’s 27.64X. DELL has a Value Score of B.

Price/Sales (F12M)

The Zacks Consensus Estimate for second-quarter fiscal 2026 earnings is pegged at $2.28 per share, which has increased by a couple of pennies in the past 30 days. This indicates a year-over-year increase of 20.63%.

Dell Technologies Inc. Price and Consensus

Dell Technologies Inc. price-consensus-chart | Dell Technologies Inc. Quote

The consensus mark for 2025 earnings is pegged at $9.44 per share, which increased by a penny in the past 30 days. This suggests 15.97% year-over-year growth.

DELL currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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