Dell's growth logic has changed! Goldman Sachs: AI is driving enterprise server replacements, and demand for traditional servers is surging beyond expectations!

Dell's growth logic has changed! Goldman Sachs: AI is driving enterprise server replacements, and demand for traditional servers is surging beyond expectations!

Driven by both AI demand and the wave of enterprise IT hardware upgrades, Dell's growth trajectory is being reshaped.

Dell's second-quarter (F2Q27) fiscal 2027 results exceeded expectations across the board. Non-GAAP earnings per share reached $7.04, significantly surpassing Goldman Sachs' estimate of $4.96, the market consensus of $4.92, and the company's own guidance range of $4.70 to $4.90. Revenue reached $47 billion, also exceeding Goldman Sachs' estimate of $44.8 billion and the upper limit of its guidance of $45 billion. Notably, the company also significantly raised its full-year outlook, increasing its FY27 traditional server revenue growth guidance from "over 60%" to "over 100%", and its storage business growth expectation from low-to-mid single digits to mid-double digits.

Goldman Sachs commented that the combined demand for continued replacement of enterprise IT hardware and investment in AI-related infrastructure provides Dell with differentiated long-term growth support. Analysts maintained their buy rating on Dell and raised their 12-month price target from $510 to $570, while also raising their average earnings per share forecast for FY27-FY29 by 38%. Goldman Sachs believes that...

Results exceeded expectations across the board, with profit margins performing particularly well.

Revenue for the second quarter of 2027 increased by 58% year-over-year, far exceeding previous expectations. Specifically, the Infrastructure Solutions Group (ISG) generated $31.8 billion in revenue, representing an 89% year-over-year increase, significantly exceeding the company's guidance of 75% growth.

Profitability was the biggest highlight of the quarter. ISG's EBIT margin reached 15.0%, significantly higher than Goldman Sachs' estimate of 11.7%; the Customer Solutions Group (CSG)'s EBIT margin reached 7.6%, also exceeding Goldman Sachs' estimate of 6.0%. Gross margin was 21.1%, a significant increase from 18.1% in the previous quarter, and higher than the market consensus of 17.2%.

Goldman Sachs pointed out that the better-than-expected profit margin mainly came from three aspects: economies of scale to dilute fixed costs, product structure optimization (increased proportion of self-developed IP storage products and commercial high-end PCs), and strict operational control.

Looking ahead to the next quarter (F3Q27), the company is guiding revenue of approximately $49 billion (market consensus was previously $41.4 billion) and non-GAAP earnings per share of approximately $6.50 (market consensus was $4.47), both significantly exceeding market expectations. ISG margin is expected to improve by more than 1 percentage point year-over-year (approximately 13.4%), and CSG margin guidance is approximately 6%.

Traditional server replacement cycle: AI forces enterprises to accelerate infrastructure upgrades

Goldman Sachs emphasizes that Dell's current surge in its traditional server business is not a short-term phenomenon, but rather driven by two structural forces.

First, the aging of existing equipment among enterprise customers is driving replacement demand. Dell still has approximately 1.2 million servers of the 14th generation or earlier in its current installed base that have not yet been upgraded. Enterprises are accelerating their equipment replacement efforts to improve operational efficiency and to guard against the growing number of AI-related security vulnerabilities.

Second, the inference workload of agentic AI is creating a net increase in demand for data center infrastructure. Enterprise customers are upgrading existing equipment and also need to add computing power to support AI inference scenarios, creating a cumulative effect.

On the supply side, demand for traditional servers still significantly exceeds supply. Goldman Sachs points out that Dell has decided to reallocate some memory resources from its PC product line to its traditional server product line, which is expected to drive the company to continue expanding its traditional server market share in the second half of FY27. In addition, factors such as increased content per server, the shift to Dell's self-developed IP product structure, and cost pass-through pricing also provide additional support for revenue and profit margins.

AI server orders surge, demand clearly accelerating.

The growth momentum of the AI server business also accelerated significantly this quarter.

AI server orders reached $60.9 billion in Q2 2027, a significant increase from $24 billion in the previous quarter; the backlog rose to $95 billion, and pipeline orders for the next five quarters are several times the size of the backlog. The total number of AI server customers has exceeded 6,500, covering multiple vertical industries and regions, with demand widely distributed.

AI server revenue for the quarter was $16.4 billion, exceeding Goldman Sachs' estimate of $15.5 billion.

The company also raised its FY27 full-year AI server shipment forecast from $60 billion to approximately $74 billion; and its full-year ISG revenue growth guidance was raised from 80% to 120%.

Goldman Sachs believes that Dell's capabilities in the scale and complexity of AI server deployments will help it maintain and consolidate its competitive advantage in the AI server market.

Goldman Sachs raises target price, reinforcing long-term logic.

Based on its overall performance and outlook, Goldman Sachs has raised its average non-GAAP earnings per share forecast for Dell for FY27 to FY29 by 38%, primarily driven by an increase of approximately 12% in AI and traditional server revenue, as well as improved ISG profit margins.

Goldman Sachs raised its target price to $570 from $510, based on a 18x (previously 22x) NTM+1 year EPS estimate. Goldman Sachs lowered its valuation multiple to reflect the increasing proportion of mature hardware categories such as enterprise storage in Dell's business structure.

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