Dell's AI Server Backlog Hits $51 Billion as Record Revenue Raises Margin Concerns

Dell Technologies delivered a blockbuster quarter that sent its stock soaring nearly 33% in a single session, but the euphoria has an edge: swelling costs for memory components are casting a shadow over the AI-driven profit engine. The company's infrastructure division saw AI server sales explode 757% to $16.1 billion, pushing total revenue to $43.8 billion in the first fiscal quarter of 2027 — an 88% jump from a year earlier and well above the $35.4 billion consensus on Wall Street. Adjusted earnings per share came in at $4.86, up 214% year over year.

The Infrastructure Solutions Group (ISG) was the clear star, with revenue surging 181% to $29 billion. AI-optimized servers alone accounted for more than half of that haul, and the backlog for those systems hit a record $51.3 billion, up from $43 billion just three months ago. New orders worth $24.4 billion poured in during the quarter, underscoring the insatiable appetite for the hardware that powers large language models and other generative AI workloads.

Yet that growth comes at a cost. The gross margin slipped to 18.1%, reflecting the inherently lower profitability of AI servers — margins on these machines are typically about half those of traditional servers because of the higher cost of components. Chief Financial Officer Yvonne McGill warned during the earnings call on May 28 that rising prices for DRAM and NAND flash memory are squeezing ISG's margin, which currently stands at 10.5%. Supply constraints for GPUs and memory chips, with lead times stretching to as long as a year, are already delaying some deliveries and pushing revenue into the second half of the fiscal year. Dell has responded with a daily pricing strategy to buffer against cost fluctuations and is pushing higher-margin storage solutions like PowerScale to balance the mix.

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To diversify beyond the AI frenzy, the company secured a five-year contract worth $9.69 billion with the U.S. Department of Defense, covering software procurement and infrastructure for the Pentagon, intelligence agencies and the Coast Guard. That deal supports Dell's Client Solutions Group, which posted a 17% revenue increase to $14.6 billion, with commercial client revenue climbing 18% to $13 billion — a sign that businesses are refreshing their hardware fleets.

Analysts have rushed to raise their price targets. Mizuho Securities set a $500 target and kept its "Buy" rating, while Melius Research went to $565, calling it "one of the strongest quarters in the company's history." UBS lifted its target to $440 and Citi to $475. JPMorgan and Goldman Sachs also joined the $500 club, citing the record backlog and an upgraded full-year AI server revenue forecast to roughly $60 billion, up from an earlier estimate of $50 billion. Morgan Stanley temporarily suspended its rating, noting that the hardware cycle had proven far stronger than expected.

The stock closed last Friday at $420.91 and was trading at €394.65 on Monday, a gain of 9.09% from the prior week's close and a 50.72% surge over seven days. Operating cash flow hit a record $4.1 billion for a first quarter. Looking ahead, Dell projects full-year revenue of $165 billion to $169 billion — about 47% above last year — with second-quarter sales of $44 billion to $45 billion. The question now is whether Dell can navigate the component squeeze and convert that massive backlog into profit at the pace investors expect.

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