- AI servers boost revenue but have far lower margins than traditional servers
- AI server sales are hugely unpredictable, with revenue fluctuating massively
- Companies like Dell offset low AI margins with storage, networking, and support
The high-performance computing market has long been a tough space for manufacturers to turn a profit, and this is true even with the surge in demand for AI servers.
In a new deep-dive, The Next Platform has looked into the economics faced by server makers like Dell, Hewlett Packard Enterprise, and Lenovo which shows that while those firms are aggressively pushing AI server deployments, the real profits are being made elsewhere.
The site reports that although AI server deals are increasing the likes of Dell’s total revenue and adding some profit, they are also reducing the overall profitability per dollar earned because the profit margins on AI servers are much lower than those on traditional servers and storage.
Unpredictable AI hardware sales
TNP's Timothy Prickett Morgan notes, “Almost all of the margin of building AI systems is going to Nvidia for GPUs, interconnects, and sometimes CPUs as well as to those making memory and flash storage for these AI systems. AMD is getting some margins, and eventually Arista Networks and Cisco Systems will get their shares of the AI revenue and profit pie, too, but it hasn’t really happened yet. AMD is getting a skinny slice of GPU and CPU revenue from AI servers, and Intel has an even tinier slice of CPU revenue and profit. That’s about it.”
Dell reported $2.1 billion in AI server revenue for the fourth quarter of fiscal 2025 that ended in January, down from $2.9 billion in the previous quarter and significantly lower than the $3.1 billion recorded in Q2. This fluctuation highlights the unpredictable nature of AI hardware sales.
Despite the challenges, Dell said in a call to Wall Street analysts that it expects to generate at least $15 billion from AI servers in fiscal 2026. Its AI server backlog stood at $4.1 billion at the end of Q4, but a recent $4.9 billion deal with xAI, which we reported last month, immediately pushed it to $9 billion.
“AI servers have gross margins on the order of 5 percent. A mix of enterprise servers consisting of big systems for running ERP systems and databases, midrange machines for mid-sized companies, and less capacious boxes for small businesses have gross margins that are on the order of three times higher than this,” Prickett Morgan writes.
“The networking and storage attached to these systems adds more margin, and so does installation, tech support, and financing services. The latter is where companies like Dell, HPE, and Lenovo make up for the fact that building the physical server is not worth much margin at all.”
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