Dell (DELL) reports earnings later today, and the key question is whether AI server demand keeps beating the pressure from higher memory prices. Memory pricing has been the weak spot for infrastructure names for a long time. The demand curve keeps rising, and Nvidia (NVDA) earnings last week gave a strong preview of what to expect. Dell (DELL) looks well placed to offset the memory cost problem. It is the largest of the OEM system integrators, so it has more pricing power than smaller rivals.
Why owning the server business helps
Dell (DELL) owns its server business outright, which is a real advantage. As more non-hyperscaler companies buy or lease this AI infrastructure directly, that helps a company like Dell (DELL). Testing on the Pinnacle benchmark shows a large gain in performance and real action per dollar spent when running on-premises versus using cloud hyperscalers. Dell (DELL) can push that on-prem advantage harder next quarter. This tracks with the story from Lenovo, where owning the AI server business set these firms apart from HP (HPQ), which fell last week on higher memory input costs.
Backlog and supply limits
Turning the backlog into sales is limited by supply constraints, and memory is the biggest one. Many customers and industry people say they have CPUs and GPUs, but memory is the bottleneck. Dell's Jeff Clark has said demand is accelerating meaningfully and outpacing supply. So the backlog will likely grow again this quarter.
Metrics to watch
The $60 billion forecast for data center revenue looks low. Some analysts are already raising it, and 65 billion has shown up as a consensus number. Based on Nvidia (NVDA) last week, that figure should climb significantly.
On gross margins, any improvement over last quarter would be good. Margins have been squeezed into the 17% range, which is hard for a system builder and OEM hit by memory costs. Dell (DELL) sells a lot of attach to its server deployments - networking, storage, and services - which can lift margins by at least a few points.
The stock and what is priced in
Dell (DELL) is up about 250% year to date and over 550% from three years ago. With the shares having gone parabolic, the bar is high. Even if Dell (DELL) hits every metric and raises guidance, the stock might not go higher. Still, there is likely room to grow, much like the strong day Nvidia (NVDA) had after its earnings. Today the whole AI trade is down as an exception, with HP (HPQ), Core, and Super Micro (SMCI) all lower. HP (HPQ) also reports later this week.
An options trade ahead of the print
For a high-priced stock near $440, using options to take a directional view makes more sense than trading the shares. The option market is pricing a move of about plus or minus 8.5 to 9% in either direction on a one-day basis.
One setup uses the September 4th weekly options that expire in three days. It is a short put vertical, neutral to bullish: sell the out-of-the-money 405 strike put and buy the 395 strike put, a $10-wide spread. You collect roughly a 250 credit, so the most you make is $250 per spread with about $750 in risk. More risk than reward, but the odds are better: the short 405 strike has about a 73% chance of being out of the money at expiration. If the stock rises, holds flat, or falls but stays above the 402.50 break-even, the trade profits.
Implied volatility is high going into the report, so expect a volatility crush after earnings. Even if the stock drops, that crush plus the passing of event risk means the vertical price will shrink, and you can buy it back cheaper as long as the stock holds above 402.50. This lets a bullish trader avoid being aggressive with a bought call or call vertical, sitting about one standard deviation below the current price before the position gets hurt.
The metrics to watch tonight: AI demand, server demand, gross margins, and the backlog.
