Super Micro Computer's Explosive Growth and Stock Split Announcement

This Top Growth Stock Has Just Announced a 10-for-1 Stock Split: Here's Why You Should Be Buying It Hand Over Fist Right Now

Super Micro Computer stock has become too attractive to ignore following its recent drop. Super Micro Computer (SMCI 0.34%) announced fiscal 2024 fourth-quarter results (for the quarter ended June 30) on Aug. 6, and the stock fell 20% as investors were concerned about the company's shrinking margin profile. Supermicro's revenue shot up remarkably year over year, and its guidance for fiscal 2025 indicates that its stunning growth is here to stay. What's more, management announced a 10-for-1 stock split, which will go into effect on Oct. 1. Still, the fact that the company's earnings of $6.25 per share missed analysts' expectations of $8.12 per share by a mile sent the stock packing. Will a stock split help turn Supermicro stock's fortunes around? A stock split is nothing more than a cosmetic move that doesn't alter a company's fundamentals. So, expecting Supermicro stock to surge on this announcement when it failed to live up to Wall Street's expectations won't be logical. A stock split simply increases the outstanding share count of a company by reducing the price of each share. Its market cap remains the same. An investor holding one share of Supermicro now -- which is trading at around $510 -- will own 10 shares post-split, worth $51 each. There is a view that reducing the price of each share through a forward stock split makes stock ownership accessible to a wider pool of investors, thereby increasing demand for a company's shares. Given that Supermicro stock was surging phenomenally until early 2024, there was a possibility that it could split its stock to reduce the price of each share. But as we have already discussed, a stock split won't have an impact on Supermicro's growth prospects and is unlikely to bring the stock out of the rut it is in (it has fallen 44% since the beginning of March). However, a closer look at the company's latest results, guidance, and valuation will tell us that buying this company following its steep pullback could be a smart move. Here's why. Supermicro's red-hot growth is here to stay Supermicro finished fiscal 2024 with revenue of $14.94 billion and non-GAAP (generally accepted accounting principles) earnings of $22.09 per share. Its top line increased 110% on a year-over-year basis, while earnings were up 87%. However, the company -- known for manufacturing server and storage systems -- saw a contraction in its margins last quarter. Supermicro's gross margin shrunk to 14.2% in fiscal 2024, from 18.1% in fiscal 2023. This margin pressure can be attributed to the investments that Supermicro is making to increase the manufacturing capacity of its artificial intelligence (AI) servers, which are in huge demand and driving terrific growth in its revenue. It is worth noting that 70% of Supermicro's revenue in the previous quarter was from sales of its server solutions used for deploying AI graphics processing units (GPUs). Not surprisingly, Supermicro is increasing its production capacity so that it can capture a bigger share of the AI server market. For instance, Supermicro is aggressively scaling up the production of direct liquid cooling (DLC) servers. That's a smart thing to do, as the market for liquid-cooled servers is expected to be worth $21 billion in 2029 as compared to $5 billion this year, driven by their growing adoption in AI data centers that consume huge amounts of electricity and generate a lot of heat. The good part is that Supermicro management expects "that the short-term margin pressure will ease and return to normal ranges before the end of fiscal year 2025, especially when our DLC [liquid cooling] and DCBBS [Datacenter Building Block Solutions] start to ship in high volume." This explains why Supermicro is expecting another year of solid growth in revenue in fiscal 2025. The company expects full-year revenue to range between $26 billion and $30 billion, which means that it could double its top line if it manages to hit the higher end of its forecast. Also, the midpoint of the company's fiscal Q1 non-GAAP earnings guidance of $7.48 per share means that its bottom line is set to more than double from the year-ago period's figure of $3.43 per share, despite the margin pressure. We have seen that management is expecting margins to start improving as the fiscal year progresses, so there is a good chance it could end the year with a sharp jump in its bottom line as well. That's why savvy investors would do well to capitalize on this AI stock's pullback, as it is now trading at just 14 times forward earnings and 2 times sales, despite delivering outstanding growth in both revenue and earnings. Both multiples are lower than the U.S. technology sector's average sales multiple of 7.3 and earnings multiple of 42, making Supermicro stock a no-brainer buy right now, given how fast it is set to grow in the new fiscal year.

Super Micro Computer's Sales Growth Is Incredible, but This Could Be a Problem for the Stock | The Motley Fool

Investors appear to be having second thoughts about this high-flying tech stock. Super Micro Computer (SMCI 8.60%) has been a hot buy this year, but lately, the stock has been nosediving. In just six months, it has fallen by 27%. Its year-to-date return is still impressive at 90%, but it's clear that investors appear to be growing concerned with the stock potentially hitting a peak. The company, also known as Supermicro, experienced a lot of growth due to artificial intelligence (AI) as businesses upgrade their servers and IT infrastructure. Supermicro hasn't been generating just double-digit growth; its top line more than doubled last quarter. However, revenue growth alone may not be enough of a catalyst to rally the stock much higher. Although Supermicro is coming off another strong period of growth, there's a more concerning number that investors may want to pay attention to: its gross profit. Sales growth is great, but it isn't all that important if a company's cost of revenue is high. The higher those costs are, the less gross profit there is that's flowing through to cover overhead and operating costs. If margins aren't good, it may not necessarily result in better earnings numbers. That's ultimately a key reason why investors are bullish on fast-growing companies -- the assumption is that they will generate stronger profits, which improves their earnings multiples and can ultimately lead to a higher valuation for the stock. But last quarter, which ended in June, Supermicro's gross margin, which was already low at 17% a year ago, fell even lower to just 11%. That means that for every $1 Supermicro generates in revenue, it's incurring $0.89 in costs. This is before marketing and promotional expenses and before paying administrative staff; these are direct costs related to revenue. Supermicro's business hasn't typically generated high margins to begin with. Normally, they've been around 15%. But this past quarter they dipped to a new low. Now, whether a company generates 11% margins or 15% margins may not make a whole lot of difference to investors, but it is something to keep an eye on nonetheless. What can be problematic is if its overhead and other costs start to creep up -- last quarter, Supermicro's operating expenses were less than 5% of sales. If that percentage increases, that will exacerbate the issue related to the company's thin margins. And if demand also starts to slow down, things could quickly go from bad to worse. Supermicro's revenue for the period grew by 143% to $5.3 billion, but its gross profit increased by 60% to $596.3 million, and its operating income of $343.4 million rose by 51%. Those are still impressive numbers, but the danger is that inevitably, Supermicro's growth rate will slow down. Companies aren't likely to continue spending feverishly on IT upgrades and servers forever. The AI-related spending frenzy could slow next year, especially if a recession takes place. And that could have a disastrous effect on the company's bottom line due to its problematic margins. Supermicro's valuation isn't all that expensive despite its relatively thin margins. Based on analyst estimates, it's trading at 15 times its future profits. That's not high when you consider that the average tech stock is trading at a forward price-to-earnings multiple of 29. The stock still appears to be a good buy, as Supermicro's margins have historically never been that high. Companies can make low margins work provided their other costs remain low, which is the case with Supermicro. At its current valuation, the AI stock still looks to be one of the better options out there for investors, especially with business remaining strong. Even if its growth rate slows, at a decent valuation, Supermicro stock comes with a good margin of safety which could justify hanging on to it even despite potential headwinds in the near future. There is some risk here, but may not be enough to deter investors from what's proving to be a top AI stock.

Where Will Super Micro Computer Stock Be in 1 Year? | The Motley Fool

Should you buy the dip or stay far away from this tanking tech stock? With shares down nearly 40% over the last 30 days alone, Super Micro Computer's (SMCI 8.60%) rocket-ship rally is imploding. Shares now trade at a level unseen since late January, undoing almost seven months of gains in the blink of an eye. The company is reeling after weaker-than-expected profitability. Let's explore what the next year could have in store. A great company doesn't always make a good investment because its valuation may price in unrealistic future expectations. This was one of the challenges Supermicro faced in its fourth-quarter earnings. Net sales increased by 144% year over year to $5.3 billion, driven by soaring demand for the company's AI infrastructure. However, analysts were disappointed by the company's adjusted earnings per share (EPS), which came in at $6.25 compared to expectations of $8.07. While Supermicro's business is booming, profitability is under pressure because of lower gross margins, which fell from 17% to 11% year over year. Supermicro is known for turning Nvidia's (and other chipmakers') graphics processing units (GPUs) into ready-to-use computer servers. This niche has allowed it to piggyback off the soaring demand for AI chips as more data center clients race to build up their capacity. However, Supermicro's "middleman" business model is quite vulnerable. For starters, the company relies on hugely expensive chip supplies from its partners. And it isn't well differentiated from other server makers like Dell Technologies or Hewlett Packard Enterprise, which operate a similar strategy. This competition could make it harder for Supermicro to pass costs to consumers or pad its margins by raising prices. This is a very different situation from Supermicro's partner, Nvidia, which managed to increase its gross margin from 76% to 78.4% in its fiscal first quarter because it has locked clients into using its products through popular software solutions like CUDA (optimized for Nvidia hardware) and a relentless update cycle, which can keep its chips technologically ahead of the competition. According to management, Supermicro's weaker-than-expected gross margins were mainly due to higher supply chain costs and tight inventory of key components. They expect this situation to be resolved by the end of fiscal 2025 as manufacturing partners ramp up production, but it highlights the ongoing challenge with the company's economic moat. And it could emerge again in the future. The next 12 months are shaping up to be a make-or-break period for Supermicro. Storm clouds are gathering over the U.S. economy as unemployment ticks up and consumer spending begins to stall. Analysts at JPMorgan predict a 35% likelihood of a U.S. recession by year's end, which could wreak havoc on the AI industry. Typically, when macroeconomic conditions weaken, companies tighten their belts by cutting back speculative and unprofitable investments. Consumer-facing AI algorithms would likely fit into this category because they struggle to generate enough revenue or profits to justify the massive capital expenditures needed to run and train them. Supermicro could be particularly vulnerable to a downturn because its business already faces significant competition and margin pressure. With a forward price-to-earnings (P/E) multiple of just 14, Supermicro shares are shockingly cheap. For context, the S&P 500 has an average estimate of 22, while market leader Nvidia boasts 40. It's hard to see why a company growing at a triple-digit rate should trade at such a discount, especially if it manages to get its gross margins under control. With that said, despite Supermicro's attractive discount, investors should be cautious about betting on any AI-related stock right now because of the speculative and unproven nature of the industry and the growing risk of a U.S. recession over the next 12 months.