The Price of Chasing Nvidia’s Tail
Dell Technologies is caught in a high-stakes volume trap. On November 25, 2025, the company released a third-quarter earnings report that serves as a stark warning to anyone equating revenue growth with financial health. While the headline figures scream AI dominance, the underlying mechanics suggest a company running faster just to stay in the same place. Dell reported Q3 revenue of $24.37 billion, missing the $24.6 billion consensus set by Wall Street analysts. Despite this miss, the stock saw an irrational 6% bump in after-hours trading, a surge built on the shaky foundation of AI server backlog rather than realized profitability.
The numbers tell a story of profitless prosperity. Dell’s Infrastructure Solutions Group (ISG), the segment responsible for those coveted AI servers, saw revenue jump 58% year-over-year to $11.4 billion. However, the operating margin for this group plummeted to 10.4%, down from 11.5% in the same period last year. Per the latest Q3 data on Yahoo Finance, the cost of goods sold is rising faster than Dell can hike prices on its enterprise clients. To secure the massive contracts from cloud service providers, Michael Dell is effectively subsidizing the AI revolution at the expense of his own shareholders.
ISG Operating Margin Contraction (Q4 2024 – Q3 2025)
Data reflects the steady decline in operating margins as AI server volume increases.
The High Bandwidth Memory Tax
Dell’s margin compression is not a seasonal fluke. It is a structural defect in the AI hardware business model. To build the PowerEdge XE9680, Dell must procure Nvidia H200 GPUs and massive amounts of High Bandwidth Memory (HBM3e). According to market reports from Reuters earlier this week, HBM prices have remained stubbornly high due to supply constraints at SK Hynix and Micron. Dell is essentially a pass-through entity for Nvidia’s margins.
When Dell sells a traditional server, it enjoys a comfortable markup on proprietary integration and support. When it sells an AI server, the component costs are so high that Dell acts more like a logistics company than a technology innovator. The $4.5 billion AI server backlog sounds impressive, but at a 10% margin, it barely covers the overhead of the struggling Client Solutions Group (CSG). The CSG segment, which covers consumer and business PCs, saw revenue slide 1% to $12.1 billion. The much-hyped “AI PC” refresh has yet to materialize in the form of actual sales, leaving Dell dependent on low-margin infrastructure to carry the weight.
The Backlog Mirage and Sovereign AI Risks
Investors are currently obsessed with the pipeline. During the earnings call on November 25, management highlighted $3.6 billion in AI server shipments for the quarter. But the skeptical eye looks at the fulfillment cycle. As lead times for Nvidia chips stretch, Dell’s cash flow is tied up in inventory that cannot be shipped. This is a working capital nightmare. Furthermore, the push into “Sovereign AI,” selling clusters to national governments, introduces geopolitical risks that the market is currently ignoring. Changes in export controls or shifts in diplomatic relations could turn a $500 million order into an unmovable pile of silicon overnight.
The internal metrics reveal a company at a crossroads. Dell’s cash flow from operations was $1.6 billion this quarter, a respectable number, but one that is increasingly reliant on aggressive accounts payable management rather than organic earnings growth. Per the Q3 10-Q filing submitted to the SEC, Dell’s interest expense remains a significant drag, consuming a large portion of the operating income generated by the ISG division. The company is borrowing to stay relevant in a race where the only winner so far is the chipmaker.
Looking Toward the January 2026 CES Pivot
The next critical milestone for Dell is not another quarter of server shipments, but the Consumer Electronics Show (CES) in early January 2026. This will be the moment of truth for the AI PC cycle. Dell needs to prove that the NPU-integrated laptops can command a premium price point to offset the margin erosion in the data center. If the consumer response at CES is lukewarm, the narrative of an AI-driven recovery will collapse. Watch for the average selling price (ASP) data in the next 60 days. If Dell cannot push CSG margins back toward 15%, the AI server backlog will be nothing more than a vanity metric for a company losing its grip on real profitability.
