Dell's AI servers are sold at 'near-zero margins,' causing a 16% decline in shares.

• Concerns about Dell's margins and AI server backlog caused its shares to fall on Friday.
• Despite beating analysts' expectations and providing optimistic guidance on Thursday, Wall Street remained unimpressed.
• Dell's AI servers are being sold at "near-zero margins," according to analysts.

On Friday, shares of fell more than 16% after investors were discouraged by the company's lower-than-expected artificial intelligence server backlog and an estimated decline in margins.

Dell surpassed analysts' expectations with its fiscal first-quarter results, reporting revenue of $22.24 billion, an increase from the estimated $21.64 billion.

Dell expects earnings of $1.65 per share and sales between $23.5 billion and $24.5 billion in its second quarter, which is lower than the analysts' expectation of $23.35 billion. The company also forecasted sales between $93.5 billion and $97.5 billion for the full fiscal year.

Despite the beat, shares plummeted in extended trading Thursday.

The main disappointment in Dell's results was the compression of operating margins for its Infrastructure Solutions Group year over year, despite bringing in around $1.7 billion in incremental AI server revenues.

Dell's AI servers are being sold at "near-zero margins," according to analysts, indicating that the company's AI initiatives are not generating profits yet.

Dell's Q1 25 results did not meet the very high expectations of analysts, who wrote about their disappointment in a note on Friday.

Dell reported a strong quarter, and Bank of America analysts reiterated their buy rating on the stock. However, they noted that the after-hours move was partly due to Dell's AI server backlog of $3.8 billion being lower than estimates, and the company's growth margin is expected to decline in the fiscal year.

The analysts stated in a note on Thursday that we reiterate our Buy recommendation, as we are still in the early stages of AI adoption and have a strong pipeline and momentum around AI servers. We believe that DELL will be able to capture higher AI margins over time.

JPMorgan analysts were not surprised by the investor reaction to the report, but they believe the concerns are "overblown." They kept their overweight rating on the stock and said Dell's margin choppiness would create an attractive buying opportunity.

According to analysts, the company is expected to exceed its medium-term revenue and earnings growth targets, with Dell experiencing increasing demand for AI and a resurgence in traditional infrastructure sales.

"Due to lofty expectations of a ramp with greater flow-through to the bottom-line, we anticipate investors being disappointed and more likely to closely monitor execution to achieve the promised margin improvement throughout the year," the note stated on Thursday.

— CNBC's Michael Bloom and Kif Leswing contributed to this report.