11:56 AM EDT, 05/31/2024 (MT Newswires) -- Dell Technologies ( DELL ) is expected to see more durable growth than previously expected, led by artificial intelligence server momentum and AI personal computers in the next two years despite near-term challenges, UBS Securities said in a note e-mailed Friday.

The computer maker late Thursday posted fiscal first-quarter adjusted earnings of $1.27 a share, down from $1.31 a year earlier, while revenue rose 6% to $22.24 billion. The results topped UBS' expectations for $1.17 and $21.6 billion, respectively. The company's gross margin saw pressure from growth in AI servers and a "more competitive" pricing backdrop, UBS analysts David Vogt, Andrew Spinola and Brian Luke said.

"While we acknowledge heightened AI expectations heading into the print results in a near-term reset in the share price, we continue to expect a strong ramp of AI servers from roughly (35,000) units in (fiscal 2025) to (about 50,000) units in (2026)," the analysts said. "Therefore, we believe the risk/reward is still favorable, albeit with a share price reset."

Dell's shares were plunging 22% in Friday trading. Given inflationary input costs, the competitive backdrop and a higher mix of AI-optimized servers, gross margins are expected to decline about 150 basis points this year, Chief Financial Officer Yvonne McGill said on an earnings conference call late Thursday, according to a Capital IQ transcript.

Demand signals and the company's backlog of $3.8 billion indicate AI server revenue is expected to grow "a couple hundred million" in the ongoing quarter to about $1.9 billion, according to the note. Given the timing around order placements, UBS expects "just under" $4 billion in the second half of the year. AI server demand by large hyperscalers and tier-2 cloud providers is "more robust" this year and likely next year than UBS expected 90 days ago, but likely below the market's elevated outlook, according to the note.

"While we continue to be constructive on AI server demand, (particularly) at enterprises over the next several years, we note we have been more conservative than the (market) with regards to the financial impact given the (graphics processing unit) in a server is the key driver of reported (revenue) growth and is largely a 'pass-through'," the analysts said. The brokerage expects AI PCs to be "a more material" financial contributor in the next two years.

For the full-year, the company expects adjusted EPS of $7.65, plus or minus $0.25 and revenue of $93.5 billion to $97.5 billion, McGill said on the call. Wall Street is looking for $7.73 and $95.76 billion, respectively. The company pegs second-quarter adjusted EPS at $1.65, plus or minus $0.10 on revenue of $23.5 billion to $24.5 billion, versus the Street's views for $1.70 and $23.72 billion, respectively.

"We expect the AI momentum we've seen over the past (three) quarters to continue, driving incremental revenue for the year," McGill told analysts. "In our core businesses, while the macro environment is still dynamic, our indicators point toward a stabilization with improvement as we progress through the year."

UBS increased its price target on the Dell stock to $164 from $141, with a buy rating. "While share price upside potential is more modest over the next 12 months relative to the past 12 months, we still view Dell as a secular winner in AI servers over the next several years," the analysts said.

Price: 133.88, Change: -36.04, Percent Change: -21.21