Dell's AI Gambit: Can the Old Guard Stage a Comeback?

As consumers, the Dell brand we most frequently encounter is often laptops. However, aside from computers, Dell's servers are also a major product of the company. With the explosion of AI demand, AI servers and AI PCs have raised market expectations for Dell.

From a long historical cycle perspective, many brands in the PC sector have gradually exited the market, while Dell's revenue has shown a continuous upward trend over the past thirty years. This is mainly because the company has capitalized on multiple waves of the era, such as PCs, servers, and network equipment. Currently, Dell's annual revenue is approaching $100 billion.

With its accumulation in PCs and servers, Dell has once again entered the main arena of this AI wave. As various manufacturers increase their investment in AI cloud and the potential of AI PCs, the market also anticipates that the company can achieve "greater heights." Dolphin Research will take a neutral perspective to discuss with investors the potential opportunities and risks of this veteran computer company, Dell.

This article mainly revolves around the following questions:

1) How has Dell continued to grow despite fierce competition in the PC market?

2) Is Dell competitive in the server market?

3) What is the potential of shifting from PCs to AI PCs?

4) With the support of AI servers and AI PCs, what is Dell's investment value?

This article focuses on analyzing the first two questions. Below is the detailed content from Dolphin Research on $Dell Tech(DELL.US):

I. What kind of company is Dell?

As everyone knows, Dell started with computers. After the brand chaos of the 1980s, the computer market structure began to take shape in the 1990s, with the top nine manufacturers occupying more than half of the market share. At that time, Compaq was in the lead, while Dell was still a follower. However, the two companies later took completely different development paths.

After 2000, Dell entered the server and storage device markets from PCs, gradually transforming from a single PC manufacturer to a full-stack IT service provider. Meanwhile, Compaq, which stuck to the PC track, eventually exited the market and was acquired by HP.

In Dell's development process, it has gone through four important stages: Direct Sales Model -> Internet Empowerment -> Crisis Period -> Rebuilding as a Full-Stack IT Service Provider.

a) Startup Phase (1984-1990): Direct Sales Model, Reducing Operating Costs

From the beginning, Dell adopted a "direct sales model", bypassing middlemen, manufacturing computers according to customer requirements, and shipping directly. This model directly challenged the traditional "manufacturer-distributor-retailer" model represented by Compaq and IBM at the time. Additionally, in an industry that generally adopted high inventory distribution, Dell pioneered "Build-to-Order (BTO)", which gave the company a significant supply chain advantage, allowing it to secure a place in the PC market.

① Cost Advantage: Eliminating distribution links saved 15%-20% in channel costs, and computers with the same configuration were priced over 20% lower;

② Response Speed: Production and delivery were completed within 72 hours after customer orders, while the traditional model required 2-3 weeks.

b) Expansion Period (1991-2004): Internet Empowerment and Efficiency Leap

In the 1990s, although Dell was among the top five in the PC market, it was still in a catching-up role. However, the company seized the opportunity of the internet development. In 1996, Dell combined the direct sales model with the internet, launching an e-commerce platform, achieving a key leap: the company's online daily sales jumped from $1 million to $50 million per day by 2000.

With the layout of global production bases, Dell further shortened response times. In 2001, Dell became the global leader for the first time, surpassing Compaq.

During this period, with an inventory cycle of 4 days (Compaq 60 days, HP 45 days), Dell's efficiency advantage forced Compaq into a dilemma of "losing money if prices were cut, losing market if not."

c) Crisis Period (2005-2013): Multiple Crises, Loss of Market Share

This phase was a period of crisis for the company, with product issues and the collective resignation of executives directly causing a trust crisis in the market. During this period, the company's PC market share fell from first to third, and profits plummeted, ultimately leading the company to go private in 2013.

d) Rebirth Period (2013 to Present): Full-Stack Service Provider and New AI Battlefield

After the return of company founder Michael Dell, aggressive reforms were pushed forward, with a firm transition to enterprise-level information services. In 2016, the company acquired EMC in the data storage industry for $67 billion, forming a closed-loop IT service from terminal to data center.

After the acquisition, Dell transformed from a declining PC supplier into the world's largest comprehensive company covering data storage, servers, and clients. From the current company's financial reports, it can be seen that Dell's core business is mainly divided into Client Solutions Group (CSG) and Infrastructure Solutions Group (ISG).

① Client Solutions Group (CSG): The business that Dell started with, accounting for 53%. This business mainly targets commercial and consumer sales of hardware products and related services, including desktops, workstations, laptops, monitors, and peripherals.

② Infrastructure Solutions Group (ISG): The key business after acquisition and integration, accounting for 44%. This part of the business mainly provides IT full-stack service solutions, including servers, network equipment, and storage.

Previously, the proportion of the company's client solutions reached about 60%, but with the increase in demand for AI servers and related needs, the proportion of infrastructure solutions has shown a trend of increase, and the current proportion of the two core businesses is close to 1:1.

From the comprehensive development process, Dell has been able to continue growing without experiencing the market exit situation of companies like Compaq, mainly due to the efficiency improvements brought by the company's "direct sales and supply chain innovation + online direct sales expansion" and the clear strategic positioning of the company's founder. After transforming Dell into a full-stack IT service provider, the AI empowerment in this round of transformation is expected to bring a new chapter of growth to the company's server and PC businesses.

II. Main Focus: How Competitive is Dell's Server Business?

Although products like laptops remain the foundation of Dell's business, the company's server business is currently the most watched by the market. The company typically divides its ISG business into server networks and storage, and with the growth of AI servers, Dolphin Research estimates that the company's AI servers account for about 20% of the ISG business.

How is Dell's server business progressing? Dolphin Research mainly examines it from three perspectives: industry chain situation, market situation, and competitive relationships.

2.1 Server Industry Chain Situation

The AI server industry chain covers upstream (GPU, CPU, storage chips, and other core components), midstream (AI server manufacturers), and downstream (cloud service providers, enterprise customers, and government clients).

Dell's server business is mainly located in the midstream of the industry chain, responsible for designing, assembling, and testing complete servers. In other words, the company designs and assembles various components such as NVIDIA and AMD's GPUs and CPUs into servers and then ships them to downstream cloud service providers like AWS and Google.

Since the company's downstream faces different customer groups, Dell plays two different roles: "OEM manufacturer" and "hardware integrator":

1) When facing small and medium-sized enterprise customers, Dell acts as a "hardware integrator + solution provider," mainly providing standardized server products. Dell can independently choose core components like NVIDIA or AMD, and customers can only select models from the products provided by Dell.

2) When facing large cloud service providers, the company acts more as an "OEM manufacturer + service provider." Due to the relatively strong position of large customers and their relatively clear customization needs, Dell focuses only on hardware integration and manufacturing. Additionally, due to the large procurement volume, large customers have greater bargaining power, resulting in relatively thin hardware profits for the company.

3) When facing government and related clients: Positioned between small and medium-sized enterprises and large cloud service providers, these clients have some specific requirements, and the company mainly provides localized services, with relatively moderate profit margins.

From the server industry chain perspective, facing upstream core suppliers like NVIDIA and AMD, and downstream customers like Amazon, the company's midstream segment has relatively limited bargaining power. Compared to NVIDIA's operating profit margin of up to 60%, Dell's profitability is significantly thinner, with the overall operating profit margin of the infrastructure solutions (ISG) business, including servers, maintained within the 10-20% range.

2.2 Dell's Market Position

What is Dell's position in the server market? From the current market share of the server market, it is mainly divided into ODM manufacturers and brand manufacturers, occupying 47.3% and 29% of the market share, respectively. Although Dell ranks first among brand manufacturers, it only occupies 7.2% of the market share, with ODM manufacturers still being the most chosen by downstream customers.

What do ODM manufacturers mainly do, and why are they the most chosen in the market? Here, we can first understand the specific delivery levels of servers, which can be divided into 12 major delivery levels.

Specifically, L1-L10 mainly focus on the manufacturing of complete servers, and they can be directly delivered at this point; while L11-L12 include parts such as cables, racks, and subsequent maintenance, etc.

If we compare ODM manufacturers and brand manufacturers in the server manufacturing and delivery process, we can find:

a) ODM manufacturers (such as Foxconn, Quanta, etc.): Mainly act as OEMs, focusing on hardware manufacturing (covering L1-L10 stages). After completing L10, they deliver the complete machine.

b) Brand manufacturers (such as Dell, HP, etc.): As brand manufacturers, they provide full-stack solutions (covering the entire L1-L12 stages). Based on ODM hardware manufacturing, they also add content such as cable network switches and multi-rack clusters, and provide subsequent maintenance services.

Combining (a+b), it can be found that brand manufacturers like Dell undertake more tasks than ODMs, so the gross profit margin of brand manufacturers is significantly higher than that of ODM manufacturers. Currently, the server gross profit margin of Dell and HP reaches 20-30%, while the gross profit margin of OEMs like Foxconn is only about 6%. Therefore, Dell sometimes seeks outsourcing for some orders, allowing Dell to earn the gross profit margin difference.

In this situation, large cloud service providers might think: "We have people in the company for maintenance, there are ready-made OEMs, and the demand is large, so why pay more to middlemen like Dell?" Therefore, large cloud service providers decide to eliminate the "middleman" and directly place orders with ODM manufacturers. Since large cloud service providers are the main buyers in the server market, this leads to ODM manufacturers occupying about half of the market share.

Additionally, with the increased investment in custom ASICs by companies like Google and Amazon, they will rely more on ODM manufacturers in the future. While ODM manufacturers provide hardware integration and manufacturing capabilities (L1-L10), Broadcom and Marvell will form a good supplement in areas such as networking and high-speed interconnection (L11+), and large cloud service providers will further move towards the ODM Direct model.

Although brand manufacturers like Dell and HP have obvious advantages in technology, maintenance, and response, the price advantage of ODM manufacturers directly influences the decision-making direction of large cloud service providers.

Therefore, Dell currently has a small share among top cloud service providers, and the company's core customers are mainly second-tier cloud service providers, including Tesla, Oracle, CoreWeave, Lambda Labs, etc.

In the current round of significant capital expenditure increases by top cloud service providers, Dell's benefit is not as obvious as that of ODM manufacturers. For Dell, the main driving force for server business growth comes from second-tier and emerging cloud service providers and other government and enterprise clients.

2.3 Dell's Server Product Performance and Target Customers

Due to the customization needs and relatively complete teams of large cloud service providers, the price advantage of ODM manufacturers is more apparent with significant capital expenditure. Dell, with its deep cooperation with NVIDIA and a comprehensive maintenance system, is mainly favored by enterprise and government clients. So, how competitive are Dell's server products in the market?

We compare the core performance of server products from various companies:

a) GPU Density: Dell > Supermicro > ODM manufacturers, HP HPE (8GPU/node, requires multi-node stacking);

b) Network: Dell and Supermicro both support 400G InfiniBand, ODM manufacturers focus on customized high-speed interconnection.

c) Liquid Cooling Maturity: Dell, Supermicro > HP > ODM manufacturers;

d) Maintenance and Response: Dell, HP > Supermicro > ODM manufacturers;

e) Price for the Same Configuration: Dell, HP > Supermicro > ODM manufacturers;

From the comparison content, Dell's performance, configuration, and maintenance are relatively superior to competitors, so the corresponding product prices are also higher than those of competing products with the same configuration. Comparing the gross profit margins of each company, Dell and HP's gross profit margins are maintained at around 20-30%, Supermicro's gross profit margin is about 10%, while ODM manufacturers' gross profit margin is generally 5-6%.

Based on the above information, Dolphin Research has organized a decision tree flowchart for server demand (see below):

Specifically, the server products of each company mainly target different customer groups:

① Dell Servers: Suitable for financial, medical, and government sectors where reliability is crucial, paying for reliability.

② HP Servers: Suitable for education and government scenarios, relatively saving on electricity costs (energy-saving liquid cooling design);

③ Supermicro Servers: Suitable for AI training clusters pursuing configuration and cost-effectiveness, accepting weaker maintenance services;

④ ODM Servers: Google, Amazon, and other large cloud service providers, with cost reduction needs and self-research and self-build capabilities.

2.4 Server Market Space

According to market expectations from IDC and Trend Force, the total server market space is expected to grow from $306.7 billion in 2024 to $608 billion in 2029, with a compound growth rate of 13.5%, mainly driven by the AI server market.

Breaking down the server market into specific volume and price:

a) Traditional Servers: Since the overall server market shipment volume remains stable, it stays at around 13-14 million units per year, with traditional servers maintaining around 11-13 million units. Assuming an average price of $50,000 per unit for traditional servers, the traditional server market roughly corresponds to a market space of $55-60 billion, with little growth;

b) AI Servers:

① In terms of volume: Referring to Trend Force data, the global AI server shipment volume has a compound growth rate of 27% over the past five years, which is roughly close to the compound growth rate of the combined capital expenditure of the four major cloud service providers (27.7%), as large cloud service providers are the main buyers driving the growth of the server market in this round.

On this basis, Dolphin Research expects the growth rate of AI server shipments to slow down, maintaining a compound growth rate of 15.6% over the next five years. Currently, AI servers account for about 14% of the total market volume, and this is expected to further increase to 25% by 2029.

② In terms of price: Based on market data, Dolphin Research estimates that the average price of AI servers in the market is about $150,000-160,000, with the average price significantly higher than that of traditional servers. Currently, the price of high-end AI servers has exceeded $1 million, driving the overall average price of AI servers up. As server performance and integration improve, the price of high-end products is expected to continue rising, while there is still a significant demand for mid-to-low-end AI servers in the market. Dolphin Research assumes that the overall average price of AI servers will fluctuate within a narrow range.

③ AI Server Market Space: Considering both volume and price, the AI server market is expected to grow to $551.8 billion by 2029, with a compound growth rate of 15.8% from 2025 to 2029.

Combining (a+b), Dolphin Research expects the overall server market space to grow to over $600 billion, with a compound growth rate of 13.5%. The demand growth for AI servers has expanded the server market from the previous $50-60 billion (corresponding to the traditional server portion) by ten times. By then, although AI servers will only account for 25% of the shipment volume, they will contribute nearly 90% of the market size.

2.5 AI Servers and Dell's Advantages

Server brand OEMs (Dell, HP, Supermicro) have mainly entered the AI server market successively since 2022, with each of the three brand manufacturers having their characteristics:

a) Dell: Began layout in 2023, deeply binding with NVIDIA; b) HP: Accelerated investment in 2024, establishing cooperation with NVIDIA and AMD, but relatively lagging in liquid cooling technology; c) Supermicro: The earliest among the three companies to shift fully to the AI server field, with cooperation with NVIDIA and AMD, and relatively good liquid cooling technology.

If we compare the flagship AI server products of the three manufacturers, we can find that Dell's flagship product is relatively ahead of Supermicro and HP. With the deep cooperation between the company and NVIDIA, Dell delivered the PowerEdge XE9712 to CoreWeave, which is also the world's first AI server system based on GB300, putting Dell ahead of its competitors in overall progress.

Since Dell began large-scale deployment of AI servers in 2023, the company's AI server revenue has seen rapid growth, with Dell's AI server annual revenue approaching $10 billion in 2024.

Due to the deep cooperation between the company's AI servers and NVIDIA, the quarter-on-quarter decline in revenue in the past two quarters was mainly affected by the transition of the GB series chips.

With the mass production ramp-up of GB300, driven by the demand from second-tier and emerging cloud service providers like CoreWeave, the company's AI server revenue is expected to see rapid growth in the second half of the year, showing a "low in the first half, high in the second half" pattern on an annual basis.

This analysis of Dell's server business is basically concluded, and the next article will focus on analyzing the PC business, especially the opportunities in AI PCs, and the overall value judgment of the company. Please stay tuned.

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Dolphin Research's historical articles on Dell and AI:

May 29, 2025, NVIDIA Conference Call NVIDIA (Minutes): Blackwell Contributes 70% of Data Center Computing Revenue

May 29, 2025, NVIDIA Earnings Review NVIDIA: Don't Doubt, Still the Number One Stock in the Universe!

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure