Dell Says Servers, Not PCs, Are Its Main Growth Engine in the AI Era

(Bloomberg) -- Dell Technologies Inc., the company which helped usher in the era of personal computing, said its most promising business now is the one that sells equipment for data centers.

While Dell expects PCs to emerge from their slump and generate a long-term revenue increase of about 2.5%, the division that sells servers, data storage and other office infrastructure will grow about 7% over the next few years – nearly double the forecast given in 2021, the company told investors Thursday.

The new economywide interest in artificial intelligence is fueling some of the upside, because AI requires more powerful machines, Dell Chief Operating Officer Jeff Clarke said in an interview. “AI is additive – it’s going to grow overall technology spend,” he added, citing the increased need for servers equipped with graphics processors, such as the ones made by chipmaker Nvidia Corp., and high-capacity storage.

The company said in August that it has more than $2 billion in backlogged orders for a server that is marketed for AI use. Still, Dell is constrained by the same shortage of high-power chips that is affecting the rest of the industry, Clarke said. “Demand is ahead of supply.” After the departure of Chuck Whitten in August, Clarke is Dell’s sole No. 2 to founder and Chief Executive Officer Michael Dell.

Computer makers have had a difficult year as PC purchases suffered historically steep declines after the pandemic. With the dip in computer growth, investors have turned their attention to Dell’s server business, particularly to see how the company can benefit from AI, said Bloomberg Intelligence analyst Woo Jin Ho.

Dell isn’t giving up on selling computers – it’s still a $58 billion-a-year business contributing more than half the company’s annual revenue. There’s just less potential for growth in the market, Clarke said. Still, a cycle of new purchases could be coming as many PCs bought early in the pandemic are getting old and Microsoft Corp. is pushing users to a new version of its Windows operating system, he added.

Earlier Thursday, Dell increased its long-term profit growth forecast and said it would buy back more stock. Adjusted earnings per share will now increase at least 8% per year and over 80% of cash flow will be used for share repurchases or dividends, the company said in a statement. Dell will look to do small and accretive acquisitions rather than large deals, Chief Financial Officer Yvonne McGill said during the investor event.

Dell shares declined 1.5% to $66.19 at the close in New York, although they have jumped 65% this year on enthusiasm for the data center business. Last month, the stock reached its highest point since the company returned to public markets five years ago after going private in 2013.

In his opening statement, Michael Dell said “We are happy as a publicly traded company, and we plan to stay that way.”