Super Micro Computer: Buy?

Super Micro Computer Stock: Is It a Buy?

Super Micro Computer (SMCI) has been struggling, but things might be improving. The stock, which had fallen almost 90% from its highest point, has increased by over 50% in the last month.

The company builds computer racks for data centers and benefits from artificial intelligence (AI). Its stock price fluctuates a lot because it's in a fast-changing industry. Also, its profit margins are decreasing. Currently, the stock is down 62% from its all-time high. It is important to consider if this AI stock is a worthwhile investment at its current price.

AI and Super Micro Computer

AI has boosted growth in the semiconductor and data center market. Super Micro Computer is in this area, purchasing computer chips and creating computer racks for AI tasks. They use technologies such as liquid cooling systems. Their systems are ready to be used efficiently, which is important for data centers regarding electricity and air conditioning costs.

Super Micro Computer's revenue for the last quarter was $4.6 billion, compared to $3.85 billion from the previous year. While this is a 19% increase, it follows a 200% revenue increase in the same quarter last year. The company expects revenue between $21.8 billion and $22.6 billion for the fiscal year ending in June.

Profit Margins

However, Super Micro Computer's profit margins are declining. A few years ago, the gross profit margin was almost 20%, but it has dropped to 11.27% over the past year. This indicates the company's difficulty in raising prices for its data center products. Meanwhile, Nvidia, the supplier of AI computer chips, has been raising prices.

Super Micro Computer is a middleman that struggles to capture much value from the AI semiconductor and data center supply chain.

Risks and Potential Downturns

The company's rapid growth makes it seem appealing. However, the sectors it operates in—semiconductors, data centers, and AI—are cyclical and experience significant ups and downs. AI spending has been increasing, but it could decline if technology and cloud companies meet the demand with enough supply. The gross profit margin may already be reflecting this.

Margin compression suggests that supply is catching up with demand, potentially leading to oversupply and a downturn. This might not happen soon, but the semiconductor market will eventually experience a downturn.

Investors should also remember the short report from Hindenburg Research, which alleged potential accounting fraud at Super Micro Computer. Although it is unclear if the report was accurate, it presents another risk for the stock. Management might not be completely transparent.

Earnings and Valuation

Super Micro Computer's price-to-earnings ratio (P/E) of 23.6 might make the stock appear undervalued, especially given its revenue growth. However, the declining gross profit margin has led to lower profits in recent quarters. Last quarter's operating income was $145 million, less than half of the previous year's earnings, despite higher revenue.

Considering the potential for a cyclical downturn, Super Micro Computer stock might not be as cheap as its P/E ratio suggests.

This stock carries significant risk. While there is potential for growth if the company can maintain revenue growth and improve profit margins, there is also considerable downside risk if industry spending decreases. It may be best to avoid Super Micro Computer stock due to these risks.