Dell Soars Most in Two Years on Outlook Fueled by AI Servers

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1:27Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. Let's talk about something that's moving in the opposite direction, and that would be shares of Dell. Once Dell Computer, and of course now it's just Dell Inc because it sells so much more than just PCs. Woojin Ho is our senior hardware and networking analyst. And Woojin, the story for Dell, the story for investors who want to buy Dell is all about its AI servers.

2:08Scarlet Fu:And on that front, things are looking pretty good.

2:11John Tucker:Hey, Scarlett. Yeah, look, things are looking fantastic for the AI servers. They raised their AI server guidance by about 20 % from$50 billion for this year to$60 billion evenly distributed, by the way. But there's a broader piece of the story as well. If we look at the guidance, they raised their guidance by about $25 to$27 billion. $10 billion of the increase was AI servers, but everything else, IT, traditional servers, PCs, that's doing a lot better than expected. And I think that's the piece that some people are missing here. Ujindal now sees a$60 billion AI server opportunity. How sustainable is that level of growth?

2:54John Tucker:Look, well, the way I have it modeled right now, you know, prior to results, it was $50 billion and then growing another $25 billion off of that. I mean, 25 % off of that $50 billion. So, what's happening is that we're seeing these NeoCloud as well as some of these sovereigns place multi-billion dollar AI server deals. And if you think about it, we're only at the beginning phases of adoption of AI servers. And as more of these NeoClouds and sovereigns start adding capacity, Dell is probably on the front of the line providing that equipment.

3:33Scarlet Fu:Dell is a hardware maker, which means like other hardware makers, it has to grapple with higher costs for higher input costs, including memory chips. How is the company dealing with that so far? Has it had to, in any way, eat anything in terms of margin?

3:50John Tucker:Hey, Scarlett, I think when we spoke yesterday, I asked if you bought your PC yet.

3:55Scarlet Fu:No, I haven't. I guess I'm too late now.

3:58John Tucker:Well, look, all right, so let's go down the line. Dell's not absorbing it as much as we think, right? Gross margins are actually going up, as a matter of fact, and they're passing through a lot of the input costs to customers. On the AI server side, that's being passed through because it is high in demand, but margins are low. Operating margins are low in that business, so that's fine there. But what's happening in the first half of this year, traditional servers, we're hearing server deals, server costs that are up 200 % to 300 % because of the higher input costs. And PCs, you know, second half of this year, you're, you know, a comparable PC is going to be up 20 % on a year on year basis in the second half.

4:46So is AI demand offsetting weakness in other parts of the PC market or is it actually creating new revenue streams?

4:55John Tucker:You know, that's a really good question. And that's something I think part of the story here in terms of re-rating the multiple. If we think about it, like AI demand in itself, like AI server demand in itself, you know, that eventually is going to mature. But one of the things that it may happen over the next couple of years is that as corporates start adopting AI, we are going to see a bigger demand in traditional servers going forward with higher ASPs, by the way. And that is going to not only reinvigorate companies like Dell, but like HPE as well as Lenovo going forward.

5:34Scarlet Fu:But we haven't seen that tailwind yet for the HPEs and Lenovo's yet, have we?

5:41John Tucker:Well, Lenovo, we started to see a pickup, but I don't know if that's more front-end loaded purchases because of the component cost. But that's an emerging story that might come out over the next couple of years.

5:56Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. If your finance team spends more time finding data than using it, if there's one entity here and one here and one here and one here, if scaling your business feels like starting over, you need the Intuit ERP. Intuit Enterprise Suite is the AI-native ERP solution that's powerful, painless, and proven. Learn more at intuit.com slash ERP.

6:23John Tucker:So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto.

7:01And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies. chances are there isn't an ETF that fits your exact criteria. But on public, you just type in a prompt and their AI screens thousands of stocks and build a one-of-a-kind index. You can even backtest it against the S &P 500.

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8:07Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. So the AI arms race is in full swing. Anthropic has reportedly raised capitalists at a staggering$965 billion valuation, surpassing OpenAI. With us to discuss this, we have Mandeep Singh. He is global head of technology research for Bloomberg Intelligence. Mandeep, does this feel like a rational build-out of AI infrastructure, or are things getting a little bit excessive with all these milestone numbers we're hearing about every single day?

8:48I love how you just went right for it. I mean, look, Entropic started off the year at a$9 billion run rate. They put out a press release yesterday that they are at a$47 billion run rate. In a span of five months, their revenue ARR has grown 500%. So I think that says it all in terms of what's justifying this enthusiasm. Now, are all of them long-term winners? I would bet no. But right now, market is rewarding AI narratives. And, you know, we saw that with Dell last night. Any company that has an AI story is getting bid up. And obviously, you have to show it in the numbers, in the guidance, in the acceleration.

9:34But, you know, the CapEx numbers are going up because of this 5x increase in Anthropics ARR. And so right now, there is a frenzy in terms of building the AI infrastructure because there is clear monetization that Anthropic is showing in their revenue numbers.

9:51Scarlet Fu:OK, let's be clear. Anthropic is private and this fundraising round keeps them private. But everyone's anticipating that at some point they will go public. Do they need to go public because they've held on this long and they haven't had to go public? Do they want to go public? I think so. Their investors, clearly the ones who finance this$65 billion round and the earlier ones, You know, when you talk about a company close to a trillion dollar market cap in the private market, I mean, I go back to Uber's, you know, IPO. Uber wasn't as big as Entropic and Open AI are. But, you know, they obviously had a lot of growth behind them when they went public.

10:34The company wasn't profitable. And, you know, there was a lot of concern about the cash burn. I feel something similar may happen here. Even though these companies are growing very fast and clearly, you know, they are part of this big technology shift that is underway. But at some point, I think people will start to focus on their profitability. And that's where, you know, this business model being so capital intensive, unlike the software companies that, you know, we've seen in the past. I think the concern around profitability will surface. But for now, everyone is focused on the top line growth and, you know, the ARR kind of increases that we are seeing with all of them, really, because coding agent as a use case is huge.

11:23And it is a big addressable market and everyone wants to cater to that. Is having access to computing power becoming the biggest competitive advantage when it comes to building out AI? Well, that's what Jensen Wong says. Computers revenue. I'm paraphrasing him. and I think right now that is the case. Look at what SpaceX is doing with XAI data centers. They were training their own model. Now with their S1 filing, they're saying they will be renting that compute to guess who? Anthropic. And they will generate 15 billion revenue per year out of just renting the compute because they build the data centers that no one else has.

12:06They have the compute. And even though they are behind when it comes to training their own models, but they can rent it out the compute in the meantime and generate$15 billion in revenue out of that.

12:17Scarlet Fu:Alex mentioned it earlier that anthropic raising at a$965 billion valuation makes it bigger than OpenAI. It feels like this is OpenAI's race to lose at this point. I mean, clearly, I think they are under a lot of pressure. And in terms of who files for, you know, going public first, my guess is OpenAI would want to do it first because they want to own the narrative as opposed to, you know, Anthropic going first and everyone realizing, you know, obviously Anthropic is growing faster than OpenAI right now. And if they take all the liquidity away, then OpenAI coming in later will struggle, you know, in terms of just making sure that they have investors excited about investing in OpenAI.

13:07And Mandeep, one more question for you. Apollo is reportedly helping finance AI chip purchases. What does that tell us about how capital intensive this race has become? Well, so for all the NeoClouds, whether it's CoreWeave, Nebius, outside of the hyperscalers, whoever is renting the GPUs, they don't have the balance sheet to buy, you know, these expensive chips or servers. And so in those type of instances, that's where the PE guys like Apollo, Blackstone, they come in and they're helping finance those deals because, you know, there are a lot of new clouds that are growing very fast. And for them to sustain this kind of growth rate, they have to keep building the infrastructure, keep getting the chips, and these are getting financed by the likes of Apollo.

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15:08That's public.com slash market. Ad paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. A business gift is never just a gift. It's a thank you, a milestone, a moment of appreciation. It's a message about how much someone matters and what your brand stands for. At 4imprint, you'll find thousands of customizable options, like premium apparel, branded drinkware, tech, totes, and more, each chosen not just for function, but for meaning.

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16:244certain.

16:27Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. And hi, everybody. I'm John Tucker. This is Bloomberg Intelligence along with Alex Siminova. We have lots of space news, Alex. A lot going on. We have SpaceX cutting its IPO valuation goal to$1.8 trillion, still an exorbitant number. and of course, Blue Origin's rocket exploding. That was big news overnight. Yeah, and when we talk space, we go to the guy who puts space in aerospace, George Ferguson, joining us right now.

17:09Let's start off with the explosion, George. Man, you talk about kaboom. What happened with this thing? Do we know? Yeah, I mean, apparently they're testing out one of the rocket engines, and they had a very extreme failure. And so, look, I think, you know, we saw that Blue Origin had a similar problem back in April when it was trying to lift some ASTM satellites into orbit. One of the rockets didn't fire correctly and didn't get those satellites into the right orbit level. And so, you know, I think we're three deep. We're getting ready for the fourth Blue Origin launch. Clearly, Blue Origin has some work to do on the new Glenn rocket.

17:53I think it reminds us that this isn't as easy as it looks. SpaceX has been relatively successful in the launch business. Actually, more than relatively, very successful, launching close to 170 rockets last year. And it looks like they've got a really big lead on their nearest competitors. Can these guys ever compete with SpaceX? Look, I think that it's a function of money, right? I think that money into R &D can close the gap over time, but I think it'll take a considerable amount of time. Bezos definitely has plenty of money, but it's going to take a considerable amount of time. And then, George, speaking of SpaceX, I want to talk to you about this news about them lowering their valuation target.

18:42$1.8 trillion, still a massive number. How do investors even begin to value a company like SpaceX? Yeah, I mean, gee, they took the cherry off the top of the sundae there, I think. I feel like they're trying to set themselves up for success in the IPO. At Bloomberg Intelligence, we've looked at some of the parts on the business. And so if you take Rocket Lab as the major space launch sort of competitor, public competitor, they're valued 90 times revenue. Now, SpaceX's space business comes in a little bit light on revenue because they don't book revenue for internal work. When we back that out, we give them 11 or 12 billion dollars of revenue from internal launch.

19:26They probably have a little bit over a billion dollars worth of value based on Rocket Lab's valuation, right? I'm not saying that's the right price. I don't know what the right price is for a rocket launching business because it is a relatively new endeavor to be done, I think, you know, to be finest in public markets. And then one of my colleagues out in the tech side of Bloomberg Intelligence and in the satellite communication side of intelligence, when they look at those businesses, they see another billion dollars. I think it's like$600 billion for the satellite constellation and$400 billion for the AI business.

20:05So, look, I feel like there are comps out there that could lead the way to the valuation of something around$2 trillion. Again, I feel like maybe they lowered the number a little bit to make sure that they overperform. And again, I think you've got to buy into the dream of long-term, much cheaper lift, data centers in space, connectivity of your phone into satellites. satellites, you've got to buy into that dream. And I think you've got to go a distance before you're going to turn it into a valuation that looks anything like what we typically have in markets for sort of normal companies. Now, be honest with me.

20:45You read the filing. How weird is it? He's a dreamer. Elon Musk is a big dreamer. I guess it's great that some of us do this, right? I didn't wake up one day and decided I want to build my own spaceport. I mean, I wanted to, but I didn't think I'd get anywhere on it. I didn't. So I think he's a big dreamer. Again, you got to buy into that and, you know, and colonizing Mars and all these things. I think you got to sift and sort of bit through some of that stuff and look at what they have now and what's at hand now. And look, I don't put past having data centers in space one day. It seems like it's a natural place.