The artificial-intelligence revolution is in full swing, not only lighting a fire under the stocks of leading chipmakers like Nvidia, but also less well-regarded "commoditized" server-makers such as Super Micro Computer (SMCI 8.89%) and its "boring," "old tech" rival, Dell Technologies (DELL 0.12%).
Of course, there was certainly nothing "boring" about Dell's 32% gain on Friday, March 1, to new all-time highs, following its fourth-quarter earnings report. No surprise: AI servers are leading the way, as management guided to 5% growth in the coming fiscal year, with 15% growth in the company's infrastructure segment, which covers data center servers, storage, and services.
But Dell's projections and commentary seemed to be an even bigger plus for up-and-coming rival and AI darling Super Micro Computer, for several key reasons.
1. AI demand is strong and not letting up
While Dell's headline revenue isn't anything to write home about, that's because it has about half of its business in PCs. And even the remaining half in servers and storage have a relatively small proportion of AI-optimized servers.
But management was key to point out that small subsegment is growing really fast. Chief Operating Officer Jeff Clarke noted on the conference call with analysts that AI-optimized servers grew 40% sequentially -- not year over year, but sequentially -- which annualizes to about 280% growth.
Could that high-growth trend continue, though? Clarke indicated yes, since Dell's AI-optimized server backlog doubled sequentially, higher than total revenue growth. And every other leading indicator seems to show the resilience in AI demand:
We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we're going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4.
Needless to say, the commentary adds just another data point beyond what we've already heard from other AI companies this earnings season that the AI buildout remains in its early stages, even one year after ChatGPT's debut. As long as that's the case across AI server vendors, Super Micro should be able to keep up its ridiculous growth rate it posted in its January earnings report.
2. Super Micro appears to be outdoing Dell in AI servers
If one looks at the overall server industry, Dell is the outright leader, with about 19.3% market share, according to website History-Computer. Meanwhile, according to the same survey, Super Micro sits at just 5.3%.
Each company's trailing revenue also backs up Dell's leadership. Dell made $33.9 billion in revenue within its infrastructure solutions group (ISG) over the past 12 months. Meanwhile, Super Micro, which only makes data center infrastructure and services, made roughly $9.2 billion in revenue over the past 12 months. That certainly matches up with the reported current market share figures, with Dell's being about 3.7 times larger than Super Micro's.
But could the AI revolution flip that script? After all, Dell only reported $800 million in AI-optimized server revenue in the January quarter, only about 8.5% of the total $9.3 billion of quarterly ISG revenue.
Meanwhile, Super Micro noted that "over 50%" of the company's $3.7 billion in revenue last quarter was from AI/GPU rack scale server solutions, meaning Super Micro made at least $1.85 billion in AI server revenue last quarter. That's around 2.5x the AI server numbers Dell did, indicating Super Micro appears to have some sort of advantage over incumbent OEMs in the field of AI-specific servers.
This could be for a number of reasons, including Super Micro's "building block" architecture, faster time-to-market, energy-efficient designs, or liquid cooling solutions. Another factor could merely be Super Micro's aggressive bid for market share, as we'll see next.
Since the overall industry is moving fast to AI server infrastructure, look for Super Micro to make more and more share gains on the overall industry, potentially challenging Dell in short order.
Image source: Getty Images.
3. Dell won't fight for market share in AI
Dell might face a bit of an innovator's dilemma here. Traditionally, Dell's server business is thought of as a high-end integrated solution with high margins. Dell made adjusted gross margins of 24.5% last quarter, but management also noted the mix shift toward more ISG sales relative to PCs raised margins relative to the prior quarter. That means Dell's ISG server segment's gross margin is higher than the 24.5% for the overall company.
While Super Micro's revenues and earnings have surged, the company has also embarked on an aggressive strategy for market share gains in the early stages of the AI buildout. Super Micro's gross margin clocked in at just 15.5% last quarter, down from 17% in the prior quarter, as the company focused, "on winning strategic new designs and gaining market share." That helped usher in Super Micro's ridiculous 73% quarter-over-quarter and 103% year-on-year growth in the December quarter.
Yet Dell doesn't seem interested in playing that game. Without mentioning Super Micro by name, Dell did note an "increasingly competitive environment." Yet management also maintained that despite pricing pressure, Dell "remained focused on profitable opportunities and we will continue to maintain that discipline and focus going forward."
That seems to indicate the current leader in the server space won't aim to compete with Super Micro's mass AI market share play, and will instead focus on its core higher-margin on-premise data center relationships.
The move makes sense on both fronts. Dell is a higher-margin dividend stock, which also has $26 billion in total debt against less than $9 billion in cash and investments. That means the company needs to generate high-margin revenue. Moreover, Dell hasn't exactly promised its investors the moon in terms of growth, saying it expects annual average revenue growth of just 3% to 4%, with ISG revenue growth of 6% to 8%. Basically, Dell's management has incentive to lock down a smaller, higher-profit portion of the market for its investors, rather than spend a lot of money in a market share bid for more of the competitive AI space.
Super Micro is in a much different position. While it bought back stock occasionally in the past at much lower valuations, the company doesn't pay a dividend and isn't heavily indebted. Therefore it can position itself as an aggressive AI growth stock and spend what it needs to try to dominate as much of this exciting new AI market as it can.
From the looks and sounds of Dell's earnings report, it appears as though this current market share leader won't be competing hard to challenge Super Micro's ascent. That's very promising for Super Micro's continued growth and market share gains.
