Dell, HPE’s AI server monetization vs margin concerns a key focus in quarterly results: Wells Fargo

Wells Fargo noted that AI server monetization and backlog expansion, versus margin concerns, would be a key focus in Dell Technologies (NYSE:DELL) and Hewlett Packard Enterprise’s (HPE) upcoming quarterly results.

The firm kept its Overweight rating on Dell but reduced the price target on the shares to $150 from $175. HPE retained its Equal Weight rating and $22 price target.

Super Micro Computer’s (SMCI) revenue guidance upside (AI servers equalling over 70% of revenue), Taiwan Semiconductor Manufacturing’s (TSM) sales momentum (July record), High Bandwidth Memory, or HBM, demand, and other data points highlight continuous AI server demand momentum, said analysts led by Aaron Rakers.

The analysts added that while they expect Dell and HPE to also point to AI server momentum (backlog monetization and expansion), persistent concern over the underlying AI server margin profile will be the key focus. They see recent news of a 12,500 RIF at Dell as reflective of protecting profitability as CSP-driven AI contributions expand.

HPE and Dell’s comments on Direct-Liquid Cooling, or DLC, will be a focus; seeing that Super Micro’s comment’s that it has about 70% share in DLC today (still very early). The analysts think competitive differentiation between vendors has yet to be proven out. The analysts noted that HPE is hosting an AI event in early-October, at which they expect liquid cooling to be a key focus

Super Micro’s margin results/comments highlight aggressiveness to set up an early competitive scale ahead of Nvidia’s Blackwell cycle, the analysts added.

Meanwhile, traditional server demand data points have been somewhat mixed/neutral in the second quarter of 2024 results, according to the analysts. They said AMD (AMD) and others pointed to some positive demand signals, while Intel (INTC) reported Xeon CPU server ship at -22% year-over-year (versus -13% year-on-year in the first quarter of 2024).

Rakers and his team expect Dell and HPE to point to typically the second half of 2024 seasonality versus pointing to an accelerating traditional server recovery. They added that, last quarter, Dell highlighted that its traditional server orders grew year-over-year for the second consecutive quarter.

In addition, the analysts said that they expect neutral storage results; with distinctive drivers for companies.

Dell (DELL): The analysts expect signs of demand recovery, resulting in year-over-year revenue growth into the second half of 2024. The second half of the year’s seasonality to drive Infrastructure Solutions Group’s EBIT percentage improvement.

Pure Storage (PSTG): The analysts have confidence in +10.5% year-over-year FY25 revenue guidance. Materializing AI opportunities plus visibility into hyperscale cloud win announced by fiscal year-end.

NetApp (NTAP): Rakers and team added that they would be focused on NetApp’s share gain momentum and ongoing flash penetration within its large HDD storage installed base. Following NetApp’s investor day presentations, they are mainly focused on the company’s all-flash block storage platforms – the ASA series arrays (both capacity flash and performance flash) as NetApp sees this as a vital growth pillar.

Wells Fargo maintained its Underweight rating and $30 price target on HP Inc. (HPQ). NetApp keeps its Equal Weight rating and $135 price target, while Pure Storage retained its Overweight rating and $75 price target.

Dell (DELL) has a Strong Buy rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ average rating is Buy, and so is the average Wall Street analysts’ rating, Buy.