Super Micro Computer: Navigating Market Volatility Amid Strong Growth

Super Micro Computer: 3 Reasons to Buy, 3 Reasons to Sell | The Motley Fool

Does the AI server maker's recent pullback represent a buying opportunity? Super Micro Computer (SMCI 6.33%), more commonly known as Supermicro, has been one of the market's hottest artificial intelligence (AI) stocks. Its close relationship with Nvidia granted it access to the chipmaker's top-tier data center GPUs before many of its competitors, and its sales of AI servers skyrocketed as more companies upgraded their data centers to process complex AI tasks. But over the past few months, Supermicro stock has tumbled more than 50%. A large portion of that decline occurred on Aug. 7 after it posted a mixed fiscal fourth-quarter earnings report. Its announcement of a 10-for-1 stock split also didn't halt that precipitous decline. So should investors consider the steep pullback a buying opportunity? Let's review three reasons to buy Supermicro -- as well as three reasons to sell it. In the fiscal 2024 fourth quarter (ended June 30), Supermicro's revenue rose 144% year over year to $5.31 billion and narrowly beat analysts' estimates. Its adjusted earnings per share (EPS) grew 78% to $6.25 but missed the forecast for 130% growth. That shortfall was mainly caused by a steep decline in gross margin, which management attributed to an unfavorable customer and product mix as well as higher development costs for its new direct liquid cooling solutions. Data source: Super Micro Computer. YOY = year over year. For the first quarter of fiscal 2025, Supermicro expects revenue to rise 183% to 230% as adjusted EPS soars 95% to 141%. That matched analysts' expectations for 199% revenue growth and 121% adjusted EPS growth. For the full year, Supermicro expects revenue to rise 74% to 100%, but it didn't provide a bottom-line forecast. Analysts expect revenue and adjusted EPS to increase 75% and 53%, respectively. The bulls still love Supermicro for three reasons: Its stock looks undervalued, its market share is rising, and it has plenty of ways to expand its business. At $509 as of this writing, Supermicro trades at just 14.8 times forward earnings. Its partner Nvidia, which is also growing like a weed as the AI market expands, has a forward multiple of 38.5. Supermicro is cheaper because it's still valued as a traditional server company -- like its larger competitors Hewlett Packard Enterprise and Dell Technologies -- instead of a high-growth AI stock. But if it proves its AI-driven growth spurt is sustainable, it could be revalued accordingly. Supermicro only controls a low-single-digit share of the broader server market, but Bank of America estimates the company already controls about 10% of the dedicated AI server market. It also expects its share to grow to 17% over the next three years as the entire industry expands about 150%. From fiscal 2024 to fiscal 2026, analysts expect Supermicro's revenue to grow at a compound annual growth rate (CAGR) of 44% as its EPS rises at a CAGR of 41%, thanks to those industry tailwinds. Such growth will be driven by its development of new liquid-cooled AI servers and the diversification of its portfolio with servers powered by AMD's cheaper AI chips. On the other hand, bears believe Supermicro stock will slip as it grapples with competition, supply chain challenges, and macroeconomic headwinds. First and foremost, Supermicro's partnership with Nvidia isn't an exclusive one. It established an early-mover advantage in the AI server market, but HPE and Dell have also been ramping up their production of their own Nvidia-powered AI servers. That competition could cause Supermicro's sales of AI servers -- which account for more than half of its revenue -- to slow. Its growth also depends on its ability to secure a steady supply of data-center GPUs from Nvidia. It struggled with a shortage of Nvidia chips earlier this year, and management recently admitted the company could face other supply constraints in the future. Lastly, unpredictable macroeconomic headwinds could abruptly throttle the expansion of the AI market overall. If the AI hype dies down because companies realize they aren't generating adequate returns on their investments in new generative AI applications, this red-hot market could fizzle out. If that happens, Supermicro could be revalued as a legacy server maker like HPE and Dell -- which currently trade at 9 and 12 times forward earnings, respectively. Supermicro faces near-term challenges, but its stock is remarkably cheap relative to its long-term growth potential. I believe its strengths outweigh its weaknesses, meaning its recent pullback looks like a golden buying opportunity.

Super Micro Computer: Much Ado About Margins (NASDAQ:SMCI)

Valued at 16x forward earnings, Super Micro stock is undervalued, with potential for a 37% upside based on forward P/E expansion. Super Micro Computer (NASDAQ:SMCI), one of the fastest-growing technology vendors of data center racks and server cooling solutions, has seen the value of its market capitalization sliced in half, currently lingering at ~$43 billion from a high of $86.3 billion in March this year. Part of the reason for Super Micro Computer's underperformance in the past few months is the cooling sentiment in the broader level of AI enthusiasm that was aggravated in the last 2-3 weeks by the unwinding of the Japanese Yen carry trades. More importantly, the recently concluded full-year FY24 results that the company announced were a mixed bag, leading to the stock losing 45% since the start of July. My analysis of the company's earnings, especially around margins, shows that while the stock performance may have been warranted due to the sudden downward revision in margins, I believe the pessimism is being overdone. Investors currently value Super Micro Computer at 16x forward earnings, which is undervalued given its margin outlook, and I recommend a Buy rating on the company. In Super Micro's Q4 FY24 earnings report, the San Jose, CA-headquartered technology vendor posted solid growth in their full-year FY24 revenue, reporting top-line growth of 110% at $14.9 billion, at par with management's prior projected range of $14.7-15.1 billion but marginally under the market's expectations of $14.95 billion. Super Micro continued to be a beneficiary of the surge of AI-focused investments hyperscalers, chip companies, and other data center providers were making, manifested by the strong product mix in the company's results, with its Server and Storage Systems growing rapidly, increasing 133% y/y to $14.14 billion. This overshadowed the ~46% growth seen in Super Micro's other reporting segment, Subsystems & Accessories, that reported sales of $806 million. Super Micro's Server and Storage Systems accounts for 95% of the company's total revenues and focuses on its server solutions, such as its liquid cooling solutions for data center servers as well as data center racks. The popularity of Super Micro's DLC server rack liquid cooling solutions (Direct Liquid Cooling) and their lego-like Datacenter BBS (Building Block Solutions) that allow architects to quickly scale data center servers is expected to ramp through FY25. Management expects revenues to grow by 87% over the next four quarters to $26-30 billion. Unfortunately, Super Micro's strong results and guidance were overshadowed by poor gross margins that seemed to fall off a cliff. As seen in Exhibit C below, management reported GAAP gross margins of 11.2%, the worst performance put up by the company in the last ten years of its operating history. The magnitude of that drop in earnings, especially when one compares the scale of the margin contraction to its previous quarters, has put many market analysts on the sidelines, which seems reasonable judging by the precipitous drop in the company's share price. On the call to discuss earnings, Super Micro's management explained that their Q4 margins dropped due to "the higher mix of hyperscale datacenter business and expedited costs of our DLC liquid cooling components in June and September quarters." To add to the company's margin misery was the shortage in components that management experienced, resulting in the company actually undershipping ~$800 million worth of product. However, what seems to be written off by most market participants is management's commentary, where they also mention that the company has now acquired most of the components that were in shortage, especially its DLC Liquid Cooling components. Therefore, management expects the $800 million worth of product to be eventually shipped out through the current calendar quarter. Per management, this appears to be a demand issue where they had understocked their inventory levels on components and were surprised by the sudden demand for liquid cooling racks, especially for the June quarter: We were surprised by the acceleration that we saw in the liquid cooled rack market. And so we had to ramp up our supply chain. We paid a lot of expedited costs and higher supply chain costs. So I think as the supply chain improves, we expect those efficiencies to now come back out, but that impacted us more than we had expected. As I mentioned earlier, the volatile pullback in the stock was expected, in my opinion, given the margin contraction, but based on the comments from management in the previous section, this appears to be isolated to 1-2 quarters and stems more from a demand imbalance than a fundamental weakness in the company's business processes. If Super Micro is guiding 87% growth in revenue, that still points to a strong year of demand-led growth. Investors would do well to remember that Super Micro experienced similar turbulence around the same time last year when it reported its FY23 earnings report, where they initially guided for FY24 revenues to grow by a respectable ~40% to ~$10 billion. At the time, a few market analysts mentioned that "high valuation" and "uncertainty" were some concerns for Super Micro. Eventually, the company ended up hiking their guidance through the year and more than doubled their FY24 revenues to $14.9billion,n as I noted earlier. This time around, analysts have a valid reason to be concerned with gross margins being impacted due to component availability. However, I feel this is isolated, and margins will recover through the year. What the correction in Super Micro's stock has done is create attractive opportunities to buy the stock here, as the valuation looks incredibly compelling. As I mentioned earlier, markets are increasingly skeptical of Super Micro's revenue trajectory over the next twelve months. This can be seen in the current consensus estimates for revenue expected to grow to $26.6 billion, at the low end of management's $26-30 billion guidance range. The all-round pessimism has also depressed Super Micro's NTM forward PE to ~16x NTM forward earnings, which is very reasonable. If I work through analysts' expectations of revenue and the current forward PE, I estimate markets are expecting GAAP operating margin to contract by 110 bp to ~7.3%. This could be a result of extrapolation from the previous year's 2.2% GAAP operating margin contraction. However, I believe markets may be overstating the contraction here, especially since most of the component shortage issues are reportedly solved. With the 50 bp contraction, I estimate Super Micro could grow its operating income by 80%, delivering an 8% operating margin. In my base case below, which is the Optimist's case, I believe Super Micro's forward PE could expand back to the 20-24x region. The expansion in forward PE should result in the stock reaching ~$745 levels, implying ~37% upside, based on a forward PE of 20x. My Pessimist's case is what markets are currently pricing Super Micro at, whereas the Ultra Optimist's case is where Super Micro could eventually head if AI Euphoria expands to elevated levels once again. My valuation model below assumes a 3.1% share dilution in the first two cases, whereas the Ultra Optimist case assumes a higher dilution rate. Super Micro's data server business is highly cyclical, which is why I have resorted to valuation with 1-year visibility. As I have explained in my previous post on Broadcom (AVGO), I do not see any slowdown in data center spend over the next year, which should boost Super Micro's outlook. While I am optimistic about the margin outlook for Super Micro, the company could still see unexpected pressures in the future due to forward demand-supply imbalances. I do not expect that to happen yet. In addition, like most semiconductor stocks, Super Micro may be pressured during the August-September time frame due to seasonal volatility, as this analyst explains. These seasonal pressures may create additional buying opportunities. Nvidia's (NVDA) upcoming earnings will also impact Super Micro heavily, as Nvidia is a large customer. Nvidia is expected to announce its earnings on August 28th, after markets close. Finally, the company has also announced a 10-for-1 stock split, effective October 1st. This will change the estimated share price and other metrics by a factor of 10. The steep correction in Super Micro's stock offers investors some compelling buying opportunities at these levels. The gross margin contraction was more than anticipated and has warranted a sharp contraction in forward earnings multiples for Super Micro. However, I believe the correction looks overdone, and investors must not forget the strong revenue growth that management forecasts, setting it up to be a strong beneficiary of robust AI data center investments. Super Micro Computer definitely looks like a Buy at these levels, in my view.

Super Micro Shares Sink Despite Revenue Surge and Stock Split. Should Investors Buy the Stock on the Dip? | The Motley Fool

Following its fiscal fourth-quarter earnings report, shares of Super Micro Computer (SMCI 5.13%) sank 20% in the next trading session, even though the server solutions company announced a stock split and issued strong revenue guidance. Despite the pullback, the stock is still up about 70% on the year. Let's take a closer look at the company's quarterly results, why it sold off, and whether investors should look to buy the dip. For its fiscal fourth quarter, Super Micro saw its revenue surge 143% to $5.31 billion, which was pretty much in line with what analysts had expected. However, its earnings per share (EPS) of $6.25 fell well short of expectations of $8.07 due to gross margin pressure the company experienced in the quarter. Gross margin, which measure the difference between what a company sells its products or services for versus how much it costs to provide those products or services, fell to 11.3% from 17% a year ago and 15.5% last quarter. The lower margins stemmed from product mix, lowered pricing to win new designs, and higher costs associated with ramping up its direct liquid cooled (DLC) rack scale AI GPU clusters. The company expects gross margins to gradually increase throughout its fiscal 2025 and eventually return to its targeted range of 14% to 17%. The company credited its strong growth to its next-generation air-cooled and DLC rack scale AI GPU platforms. Servers generate a lot of heat, and these systems help keep them cool to stop them from failing while also reducing energy costs. Super Micro has seen a lot of demand for its DLC systems as companies build out their data center capabilities to run artificial intelligence (AI) applications. It noted that it has an over 70% market share in the DLC space. Despite its tremendous growth, Super Micro said growth could have been even greater if not for a DLC liquid cooling component shortage. It estimated that about $800 million of revenue fell into July after its fiscal fourth quarter was over, due to the component shortage. Looking ahead, Super Micro forecasts that full-year fiscal revenue will be between $26 billion to $30 billion. That would be a 100% revenue increase at the high end of its forecast after it generated $14.9 billion in revenue this past fiscal year. For its fiscal first quarter, it is forecasting sales of $6 billion to $7 billion, with adjusted EPS of $6.69 to $8.27. The $7.48 midpoint of the range was below the $7.58 analyst consensus. The company also announced a 10-for-1 stock split. While stock splits do not change the fundamentals of a company, the lower share price can attract more retail investors to a stock. From a valuation perspective, Super Micro only trades at a forward price-to-earnings (P/E) ratio of 14 based on fiscal 2025 analyst estimates. Given its revenue growth, which is expected to about double next year, that is pretty attractive. That said, it is in a low-margin business, so it shouldn't command the multiple of a chip company like Nvidia or a software company like Microsoft either. The company is currently seeing tremendous growth as it benefits from the AI infrastructure and data center buildout, but it also has to be somewhat concerning to see its gross margins so weak with demand for its products so high. That's not an indication of a business that has a wide moat or pricing power. Given that fact, even after the recent sell-off, I'd probably wait on the sidelines a bit longer with Super Micro at the moment.

Super Micro Computer Stock Climbs After Its Post-Earnings Swoon

A report published over the weekend highlighted the potential of Supermicro's direct liquid cooling technology. Super Micro Computer (SMCI) shares jumped more than 6% on Monday, recovering a portion of the steep losses recorded last week after the server and data storage company released its fiscal fourth-quarter earnings. In its latest set of quarterly figures, released after the closing bell Tuesday, the server maker reported revenue had more than doubled from the prior year, edging out analysts' sales forecasts. Profits, however, fell short of expectations, and Supermicro's stock plunged 20% the next day. Although Supermicro forecasted further sales growth, increasing costs contributed to a drop in margins that appeared to underpin the negative reaction to the earnings report. Bank of America analysts downgraded the stock to "neutral," saying they expect margins to remain subdued in coming quarters. On its earnings call, Supermicro attributed the downtick in gross margins to product mix, competitive pricing aimed at securing new design wins, and elevated initial costs involved in increasing production of direct liquid cooled (DLC) technology for clusters of graphic processing units used in artificial intelligence (AI) data centers. As DLC production ramps up, the company believes it can slow manufacturing costs to drive margin recovery. In addition to the company's assertion that preliminary cost headwinds should be temporary, a report over the weekend in The Wall Street Journal suggested that Supermicro's investments in liquid cooling technology could pay off. The article highlighted liquid cooling as a "novel method" for helping AI data centers without relying as heavily on energy-intensive air conditioners. Supermicro delivered more than 1,000 liquid-cooled AI racks in June and July, according to the report, and around 30% of the server racks the company ships next year will incorporate liquid cooling. Following last week's losses and Monday's recovery, Supermicro shares have gained nearly 90% so far in 2024.

Why Super Micro Computer Is Bouncing Back Today | The Motley Fool

The server maker plunged last week after the company's fiscal fourth-quarter earnings report, which showed booming revenue growth but also a decline in margins. But after last week's drubbing, along with the recent sell-off in AI-related stocks, Supermicro and other AI names are bouncing back strongly today. Aiding the bounce was a weekend Wall Street Journal article featuring the company's new direct liquid cooling (DLC) products. On the Aug. 6 earnings report, Supermicro actually forecast near-100% revenue growth for the year ahead, which was well above analyst expectations, but for a near-term decline in margins. Management attributed this to expedited shipping costs for direct liquid cooling components, due to excess near-term demand for these solutions. Still, having so much demand that you need to pay for faster component delivery isn't the worst problem to have. Supermicro management also forecast for its margins to rise throughout the next 12 months. This weekend's Wall Street Journal featured a piece on direct liquid cooling (DLC) technology. The article discussed Nvidia's upcoming Blackwell chip, which when put into a GB200 server will need to be liquid-cooled. Two weeks ago, The Information reported that Blackwell would be delayed, due to a design flaw discovered late in the process. However, various analysts weighed in over the weekend, saying worries about the delay were overblown. UBS analyst Tim Arcuri reaffirmed his $150 price target on Nvidia, while saying the pushout would only be four to six weeks at most, leading only to a slight decline in his earnings-per-share projections for this year. If that's the case, then there should be ample demand for DLC solutions over the next 12 months, given that GB200 servers require it. So, a brief delay wouldn't likely affect Supermicro's strong outlook. Also encouraging for Supermicro specifically was the WSJ article noting some problems in DLC testing pertaining to leaks and other issues at some of Supermicro's Asian competitors, including Hon Hai Precision Industry, also known as Foxconn, as well as two other unnamed suppliers. People familiar with the matter said recent social media rumors around leaks and failures could be attributed to normal issues that come up in regular product testing. Yet on last week's conference call, Supermicro CEO Charles Liang noted Supermicro had already shipped 1,000 liquid-cooled racks in both June and July, likely for Nvidia H100 and H200 servers, accounting for at least 15% of all global server deployments during those months. Liang also estimated Supermicro accounted for at least 70% to 80% of all DLC servers shipping today. So, Supermicro is apparently first to market with working DLC solutions. And if Blackwell is only delayed by a few weeks, that could be a good combination for SMCI's stock. The recent sell-off no doubt has investors jittery, but there really isn't any evidence that AI investment is slowing down. If anything, big tech companies said this earnings season they would continue to increase AI investment this year and next. So as long there isn't a severe recession, the recent pullback could be an opportunity to pick up AI winners like Supermicro on the cheap.

Super Micro Computer Shares Are Trading Higher Today: What's Going On - Super Micro Computer (NASDAQ:SMCI)

Despite EPS miss, Super Micro reported a 110% year-over-year revenue increase in fiscal 2024, driven by high demand for AI infrastructure. Super Micro Computer, Inc. SMCI has been on an upward trajectory, with its shares recently moving higher Monday. The stock's performance possibly reflects a series of financial and strategic developments. What To Know: Last week, Super Micro reported its fourth-quarter financial results for fiscal year 2024. The company posted revenues of $5.31 billion, aligning with Wall Street estimates. However, its earnings per share (EPS) of $6.25 fell short of the anticipated $8.10. Despite this earnings miss, the company showcased impressive annual growth, with fiscal 2024 revenue surging by 110% year-over-year, driven largely by the increasing demand for AI infrastructure. The company also maintained a cash position, ending the quarter with $1.67 billion on hand. In a strategic move, Super Micro's board approved a 10-for-1 stock split, set to take effect on October 1 2024. The company also issued strong guidance for fiscal year 2025, projecting revenues between $26 billion and $30 billion. For the first quarter of fiscal 2025, Super Micro anticipates revenue between $6 billion and $7 billion, with EPS expected to range from $6.69 to $8.27. Analysts Reaction: Analysts remain divided on Super Micro's outlook, with price targets varying widely. While JP Morgan rated the stock "Overweight" with a target price of $950, Rosenblatt issued a "Buy" rating with an ambitious target of $1,300. On the other hand, B of A Securities downgraded its rating to "Neutral" with a price target of $700, reflecting some caution in the market. What Else: Super Micro also announced its participation in several upcoming investor conferences. These include the Rosenblatt 4th Annual Virtual Tech Summit on August 19 2024, the Deutsche Bank 2024 Technology Conference on August 28 2024, Citi's 2024 Global TMT Conference on September 4 2024 and the Goldman Sachs Communacopia + Technology Conference on September 9 2024. SMCI Price Action: As of the latest update, SMCI shares have risen by 7.36%, trading at $546.20 according to Benzinga Pro. See Also: What's Going On With Super Micro Computer (SMCI) Stock? Image via Shutterstock. Market News and Data brought to you by Benzinga APIs