Super Micro Computer: AI Hardware Leader Faces Challenges Amid Rapid Growth

This Artificial Intelligence (AI) Player That Led Market Gains in the First Half Ran Into Trouble in Recent Weeks. But Wall Street Says to Buy the Stock and Expects It to Soar 60%. | The Motley Fool

Could there be more growth ahead for this potentially troubled AI player? Artificial intelligence (AI) just might be the biggest investing theme of the year. Technology companies operating in this area drove gains in the S&P 500 in the first half, and many of these players continue to advance. Why are investors so interested in AI? Because of the technology's potential to revolutionize everything from your daily routine to how a company operates. As a result, companies making or using AI could see their earnings soar. One of the early winners is Super Micro Computer (SMCI 2.93%). This AI equipment maker has seen earnings take off since the start of the AI boom, and share performance has followed. Supermicro stock has soared 2,100% over the past five years, and in the first half of this year, it rose 188% -- even beating AI market star Nvidia. The Supermicro story, though, has included a few difficult chapters in recent weeks, weighing on investors' appetite for the stock. But Wall Street sees this as a buying opportunity and expects the stock to surge in the coming 12 months. Should you take Wall Street's advice or hold off on buying this AI player? Let's find out. First, a bit of background on this AI player. Supermicro isn't a new kid on the block. It's been around for more than 30 years. The company sells servers, workstations, and other products integral to the operations of data centers. Prior to the AI boom, Supermicro progressively grew revenue and profit, but these metrics truly took off as demand from AI customers gained momentum. This year, Supermicro reached a key milestone: Revenue in one quarter surpassed what it generated in a whole year as recently as 2021. Customers have flocked to Supermicro thanks to its ability to quickly tailor its products to their needs and include the very latest chip innovations. The company is able to do this for two reasons: Most of its products contain similar parts, making them fast and easy to assemble; and Supermicro works hand in hand with all of the top chip designers so that it can immediately integrate their latest chips in its equipment. On top of this, Supermicro may see a new burst of growth ahead as demand for direct liquid cooling (DLC) of data centers takes off. Supermicro predicts 25% to 30% of new data centers in the coming 12 months will include DLC and intends to dominate the market. All of this sounds great. So what's gone wrong for Supermicro in recent weeks? In late August, Hindenburg Research released a short report, alleging troubles at the company, and this was followed by a Wall Street Journal (WSJ) article about a potential Justice Department probe into Supermicro. The company also delayed the filing of its 10-K annual report, a move that prompted investors to worry about Supermicro's earnings. Supermicro called statements in the short report "false or inaccurate." In the same letter to customers, it said that though its 10-K report would be late, the company doesn't expect any significant changes to earnings figures. As for the WSJ report, Supermicro declined to comment. Supermicro stock slid 29% in the one-week period following the short report, but it's since climbed more than 20% from its low on Sept. 6. Today, the average Wall Street recommendation is a "buy," and the average share-price forecast calls for a 60% increase over the coming 12 months. So, Wall Street clearly is optimistic about the company's prospects. Now, let's get back to our question. Should you follow Wall Street and buy this stock on the dip or wait on the sidelines? The answer depends on your comfort with risk. If you're a cautious investor, now isn't the time to buy Supermicro shares. Though the company has commented on the short report, we still don't know whether Supermicro faces a Justice Department probe. Of course, a probe isn't necessarily a deal-breaker when it comes to investing. Many companies have faced government probes, and the probes haven't hurt the long-term investing case. Still, cautious investors may want to wait for more clarity on the uncertainties weighing on Supermicro before diving in. If you're an aggressive investor, though, and can tolerate some risk, you might consider picking up a few shares of Supermicro at the current bargain level of 14 times forward-earnings estimates. After all, the facts we have today still support a fantastic long-term growth story, and early investors could potentially win big.

Billionaire Jeff Yass Just Increased His Position In This Dirt Cheap Artificial Intelligence (AI) Stock By 148%. Here Are 3 Things Smart Investors Should Know. | The Motley Fool

Jeff Yass's fund, Susquehanna International Group, just bought 5 million shares of Super Micro Computer. Every quarter, investment firms that manage more than $100 million file a form 13F with the Securities and Exchange Commission (SEC). I find the 13F to be a valuable tool because it breaks down in detail which stocks institutional investors are buying and selling, and it can be interesting to try and identify patterns among Wall Street's biggest money managers. One investor that I enjoy following is Jeff Yass, the co-founder of Susquehanna International Group (SIG). During the second quarter, SIG purchased roughly 5 million shares of artificial intelligence (AI) stock Super Micro Computer (SMCI 2.25%) -- increasing its position in the company (also known as Supermicro) by 148%. Below, I'm going to break down the mechanics of Supermicro's place in the AI realm and address some important topics that should be considered when investing in the company. Supermicro often comes up when semiconductor companies such as Nvidia or Advanced Micro Devices are mentioned. For this reason, many investors perceive Supermicro as another chip stock -- but in reality, this isn't exactly right. Supermicro is an IT infrastructure business that specializes in designing storage architecture for Nvidia's and AMD's graphics processing units (GPU). So, while demand in the chip industry has direct influences on Supermicro's operation, the company itself is not a true semiconductor stock. Although Supermicro has undoubtedly benefited from AI tailwinds, the financial profile below paints a pretty sobering reality. Namely, Supermicro's gross profit margin is trending in the wrong direction. Despite consistent acceleration across the top line, Supermicro's unit economics are pretty backward. While management has said that these headwinds will be short-lived, the reality is that IT infrastructure is not a high-margin industry. This dynamic leads me to my next important topic: competition and the risk of commoditization. While Supermicro has done a respectable job of fostering relationships with some of the world's leading GPU producers, these relationships are by no means exclusive. Supermicro competes with plenty of other businesses that offer IT architecture solutions, including Dell Technologies, Hewlett Packard Enterprise, Lenovo, and Cisco. These companies are much larger and more diverse than Supermicro, making them formidable rivals. Broadly speaking, when the same solution is offered by many players within the same industry, companies become forced to compete on price. So, even though Supermicro's management has been forecasting increasing operating profit, I question how profitable the company will ever become as competition heats up. I think the biggest topic investors need to be aware of when considering an investment in Supermicro is allegations made against the company by Hindenburg Research. Hindenburg is a short-seller, which means the firm has a financial interest in seeing a stock price decline. Since Hindenburg published its short report on Aug. 27, shares of Supermicro had dropped by 16%. To summarize, Hindenburg alleges that Supermicro's financial controls and accounting practices may contain errors, perhaps intentionally. Considering Supermicro did wind up delaying its annual report, it's clear why some investors sold the stock and moved on. Almost as concerning is a Wall Street Journal report that the U.S. Department of Justice is looking to Hindenburg's claims. With all of this said, nothing material has come from Hindenburg's allegations yet, and it seems that the pronounced sell-off is rooted more in fear than anything concrete. Supermicro currently trades at a forward price-to-earnings (P/E) multiple of about 13.5. As the chart below indicates, Supermicro's valuation multiples have deteriorated in recent months as speculation rises over the company's future. I can see how the allegations against the company may spur some panic selling. Meanwhile, the packed competitive landscape does make Supermicro's long-run profitability picture hard to forecast. Nevertheless, I see Supermicro remaining as an important business in the world of IT infrastructure. In the near term, I think Supermicro's most obvious catalyst is the planned launch of Nvidia's Blackwell GPU architecture. Furthermore, as businesses continue pouring billions of dollars into AI infrastructure, such as data centers, network connectivity solutions, and GPUs, I'm hard-pressed to buy into the narrative that Supermicro isn't well positioned for the long run. While I understand the risks surrounding Supermicro, I see the decline in the company's valuation as a rare opportunity to scoop up shares of a growth stock at a more reasonable price.

Meet the Newest Stock-Split Stock to Join the S&P 500. It Soared 1,780% Over the Past Decade, and It's Still a Buy Right Now, According to 1 Wall Street Analyst

This artificial intelligence (AI) hardware provider has joined the S&P 500 index and initiated a stock split this year. The S&P 500 (^GSPC -0.03%) is the most widely followed index in the U.S., representing the 500 largest companies in the country. Given the breadth of companies that make up the benchmark, many consider it the most dependable measure of total stock market performance. To qualify for membership in the S&P 500, a company must meet the following prerequisites: Super Micro Computer (SMCI 2.25%), also known as Supermicro, is one of the most recent entrants to the S&P 500. It made the cut in March, and is one of only 11 companies added to the fold so far this year. To the delight of shareholders, the artificial intelligence (AI)-centric server maker recently completed a 10-for-1 forward stock split. The move was preceded by revenue that jumped 955% and net income that surged 1,030%. This has fueled an impressive rise in its share price, which soared 1,780%, as the rapid adoption of generative AI fueled accelerating sales and boosted its profits. Despite these impressive gains, many on Wall Street believe there's more upside ahead. Let's look at Supermicro's competitive advantages, the challenges it's facing, and whether or not it's a buy. A winning serve Supermicro has a track record of creating custom servers going back 30 years, so when the need for solutions geared toward the unique demands of generative AI exploded on the scene, the company was there to answer the call. The secret to Supermicro's success is its modular building-clock architecture. By manufacturing these components separately, the company can offer a wide variety of servers and storage systems customized to meet each customer's specific needs, from build-to-suit to plug-and-play rack-scale systems. Supermicro also offers support to help customers "install, upgrade, and maintain their computing infrastructure." Another advantage is the company's strong relationships with the industry's most sought-after chipmakers. This ensures that Supermicro has access to a steady supply of the most cutting-edge semiconductors to power its systems. Furthermore, energy efficiency has captured the spotlight, the result of power-hungry AI solutions. Supermicro's long history of focusing on energy efficiency quickly attracted the industry's attention. The past year has been one for the record books for Supermicro. For fiscal 2024 (ended June 30), revenue surged 109% year over year to a record $14.9 billion. At the same time, its earnings per share (EPS) soared 76% to $20.09. Management said it continues to see "record demand," as sales have increased five times faster than the industry average during the past 12 months, which helps illustrate that Supermicro is taking market share from its rivals. CEO Charles Liang suggested that the company controls an estimated 80% of the direct liquid cooling (DLC) server market for AI. The company is experiencing growing pains, as evidenced by sinking margins, though management attributes those to product mix and a bottleneck related to certain components. On the plus side, the $800 million in affected sales weren't lost, but rather pushed into the current quarter. CFO David Weigand said that "We have a path to improve gross margins to the target range of 14% to 17%," citing improving manufacturing efficiencies. The company also expects to boost profit margins when new manufacturing facilities come online later this year, which should also increase production capability to support $50 billion annually in sales. That's not to say there aren't risks. Supermicro was the target of a short attack by Hindenburg Research, which alleged accounting irregularities without providing much in the way of proof. Supermicro then fanned the flames when it announced its annual report would be filed late. If that weren't enough, reports emerged that the Department of Justice (DOJ) had opened an investigation in the wake of the short report. If the company can work through these challenges, chances are the stock will continue its relentless climb higher. Wall Street is still bullish on Supermicro In the light of these dark clouds, you might think that Wall Street would be abandoning Supermicro en masse -- but that's simply not the case. Of the 17 analysts who covered the stock in September, seven rate the stock a buy or strong buy, and none recommend selling. Furthermore, an average price target of roughly $77 suggests there's still upside potential of 62% compared to Supermicro's closing price on Friday. Loop Capital analyst Ananda Baruah remains the biggest Supermicro bull on Wall Street, with a buy rating and a Street-high, split-adjusted price target of $100. That suggests potential gains for investors of 111% compared to Monday's closing price. The analyst believes Supermicro's leadership was likely already aware of the DOJ probe and is cooperating with regulators. Baruah went on to say the company could more than double its revenue run rate to $40 billion over the next couple of years, which should fuel an increase in its stock price. For those willing to take on some additional risk, Supermicro offers a persuasive value proposition. It's currently selling for 23 times earnings and less than 2 times sales -- the very definition of an underpriced stock. Supermicro's industry-leading position, secular tailwinds, and attractive price combine to represent a compelling opportunity for savvy investors.