Revealing Inflation And Risky Enterprise AI

Todd Moses
June 01, 2024

Dell reported earnings after the market close Thursday, beating both earnings and revenue estimates, but its results suggest AI uptake across its enterprise is slower than expected.

Inputs that matter: Dell's current AI strategy rests on the critical presumption that enterprises must deploy infrastructure on-premises instead of in the cloud to take advantage of proximity to data.

  • The company used almost precisely the same play during the Great Cloud Wars.
  • Even for enterprises that are ready to take on the challenges now, supply constraints need to be overcome.
  • In effect, enterprise companies compete for the same Nvidia GPUs hyperscale that tier-2 cloud providers purchase at scale.
  • As a result, Dell customers can expect long lead times for GPU servers right now.

The opportunity: Dell's margins on networking and storage gear are significantly higher, and those solutions will likely be bundled with these AI servers.

  • As Jeff Clarke noted, "These [AI] models that are being trained require lots of data. That data has got to be stored and fed into the GPU at a high bandwidth, which ties in networking."
  • An entire cohort of startups emerged to solve the complexity problems and replicate the functionality of public clouds on-premise.
  • Most burnt to ashes when public clouds showed up with their on-prem solutions, AWS Outposts, and Azure Stack.

Zoom in: Meanwhile, Salesforce's valuation has fallen substantially from pandemic-era levels, but the company still needs to meet investor expectations.

  • Salesforce Co-CEO Marc Benioff touted the opportunity in artificial intelligence (AI), saying, "We are at the beginning of a massive opportunity for our customers to connect with their customers in a whole new way with AI."
  • RBC analyst Rishi Jaluria explains, "This is a tough environment we're in."
  • "I know there were some green shoots, and Marc Benioff sounded bullish off the Q4 print, but the macro environment for software is callous right now, and I think that's very clear."
  • Regardless, Nvidia is expected to surpass Apple as the world's second-most valuable company as the biggest beneficiary of the surge in the adoption of AI applications.

Between the lines: "If you were to look at the investment community out there, they don't want any type of massive M&A within Salesforce," CFRA analyst Angelo Zino told Yahoo Finance.

  • The San Francisco-based company's notable past purchases include the $27 billion acquisition of Slack, the $15 billion investment of Tableau, and the $6 billion purchase of MuleSoft.

Follow the money: Pricing Friday morning indicated a probability that the first-rate move likely won't come until November, at the Fed's meeting that concludes two days after the presidential election.

  • As inflation data has become hotter than expected, central bank officials have encouraged a cautious approach.
  • That means the Fed is less likely to cut rates anytime soon.

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