Dell Technologies (DELL) shares tumbled 8% on Thursday, extending an 11% drop on Wednesday as investors grew increasingly concerned about whether enterprise AI spending can justify the massive buildout of AI infrastructure.
The selloff also hit other data center equipment stocks, which have rallied this year on expectations of strong demand for AI servers and related hardware.
Dell has been one of the market’s top performers this year, with shares up roughly 271% year-to-date as of writing.
However, sentiment toward AI infrastructure stocks has recently weakened amid concerns about OpenAI’s revenue figures and rising interest rates, which could make debt-financed AI projects more expensive.
Barclays downgrades Dell stock
On Wednesday, Barclays downgraded Dell, Hewlett Packard Enterprise (HPE), and NetApp (NTAP) “after a significant run and on enterprise AI timing,” according to CNBC.
Barclays cut Dell’s rating to equal weight from overweight and lowered its price target to $574 from $603. The stock currently trades at $467.
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The analysts said they have yet to see a “meaningful AI inflection” in enterprise spending. Instead, they attributed much of the recent revenue growth to higher memory prices, which hardware companies have passed along to customers.
“There is growing sentiment about enterprise AI adoption creating a hardware refresh,” the Barclays analysts wrote, adding that businesses are typically allocating just 5% of their IT budgets to AI. “We believe the strong enterprise revenues are more of a function of memory costs than a move to enterprise AI at this time.”
The analysts also found that only about a quarter of enterprise AI spending goes toward hardware. They warned that infrastructure-related revenue could weaken as memory prices stabilize or decline.
Barclays said it is taking a more cautious view of IT hardware companies “that are more aligned with enterprise spending.”
Dell reported strong earnings in September
The recent selloff comes just weeks after Dell reported strong fiscal second-quarter earnings on Sept. 1, beating Wall Street’s expectations and raising its full-year outlook.
Dell reported adjusted earnings of $7.04 per share, well above analysts’ estimate of $4.92.
Revenue climbed about 58% from a year earlier to $46.97 billion, topping expectations of $44.92 billion.
For the full year, Dell now expects adjusted earnings of $25.50 per share and revenue of $192 billion, up from its previous revenue forecast of $165 billion to $169 billion.
Related: Analyst resets Dell stock price target after earnings
“We are also seeing AI-related tailwinds in traditional servers and networking, along with early signs of increased storage demand,” said Dell’s operating chief, Jeff Clarke, on a call with analysts.
Investors initially cheered the results, sending Dell shares up 15% on Sept. 2, followed by another 4.9% gain on Sept. 3.
But the latest downgrade suggests that Wall Street is becoming more cautious about whether those AI demands can translate into sustained revenue growth for hardware companies like Dell.
