Super Micro Computer Stock: Analyzing Growth Potential and Investment Alternatives

Should You Load Up on Super Micro Computer Stock While It's Down 60% From Its All-Time High? | The Motley Fool

Super Micro Computer (SMCI -2.10%) was one of this year's best-performing stocks, even outpacing Nvidia. However, it has fallen on hard times after a poorly received earnings report and a short-seller announcement. The stock now sits more than 60% off its all-time highs after combining these two factors and a general sell-off due to extreme valuation. With the stock now at this low point, many investors (including myself) may wonder whether shares might be a steal at these levels. Let's take a look, as there is a lot to be excited and concerned about. Super Micro Computer (often called Supermicro) provides components necessary for building large-scale data centers and servers. Because of the high demand for extreme computing power to train artificial intelligence (AI) models, Supermicro is seeing a demand spike similar to that of Nvidia for its products. This space is fairly commoditized, as there isn't much to differentiate between providers. But Supermicro's highly customizable server products set it apart from the competition. Additionally, the company's architecture is the most energy-efficient offering available. This is critical because energy costs are incredibly high for these servers. Supermicro's business has exploded as the demand for AI computing has increased. In the fourth quarter of fiscal year (FY) 2024 (ending June 30), its revenue rose 143% year over year to $5.3 billion. It also guided for $26 billion to $30 billion in revenue for FY 2025, indicating 74% to 101% growth. However, its gross margin has significantly declined because its product mix is becoming more heavily slated toward its new liquid-cooled technology. Management expects its gross margin to improve throughout 2025 and beyond due to relocating its production facilities, but this short-term headwind is expected to put a lot of pressure on its profit margin. This is if Supermicro's accounting is accurate, as there are recent allegations regarding concerns with its internal controls. Supermicro also announced it would be late filing its end-of-year Form 10-K to the Securities and Exchange Commission (SEC) due to management's assessment of internal controls over financial reporting. This announcement came nearly at the same time as famed short-seller Hindenburg Research announced its short position in the company. While Hindenburg's announcement included several reasons it believes the company is engaged in some level of impropriety, it mainly alleges that Supermicro's end-of-quarter accounting techniques make it seem like the company is doing better than it actually is. Of course, Hindenburg is a motivated short-seller, and the validity of its claims must still be proven. Additionally, in 2018, Supermicro was temporarily delisted from the Nasdaq stock exchange because it failed to file timely financial statements. The SEC fined the company in 2020 for improper accounting. While some people lost their jobs because of this, Hindenburg alleges that these people were rehired within three months of paying the fines. Nearly all investors' actions are based on the financials the company reports to them. If that information is unreliable, it's nearly impossible to assess the stock adequately. The report caused the stock to plummet nearly 30%, indicating that most investors wanted nothing to do with it. But is this a legitimate reaction? While there are likely some accounting issues at Supermicro, there is also real demand for its products and services. While this may affect a few percentage points of revenue, it's unlikely to be billions of dollars' worth. Furthermore, the stock trades for just 13 times forward earnings after the sell-off. That's dirt cheap for a company benefiting from the massive AI demand wave. So, what should investors do? I think investors should be patient before taking a large position in the stock. There are a lot of unknowns right now, and it's too early to tell how the stock will react. However, taking a tiny position (say less than 1% of overall portfolio weight) may not be a bad idea, as there is a lot of upside here. And if Supermicro declines more, it won't affect the overall portfolio much. Supermicro is still a company with huge demand for its product, but some allegations surround its financials and internal controls. So, only time will tell.

Worried About Super Micro Computer? Here Is a Solid Artificial Intelligence (AI) Stock to Buy Hand Over Fist Instead. | The Motley Fool

The growing demand for AI servers is giving this hardware specialist's business a nice boost. Super Micro Computer (SMCI -2.10%) has been one of the hottest stocks on the market since the beginning of 2023 when the artificial intelligence (AI) revolution started gaining momentum, but the company ran into tough times of late. More specifically, Supermicro stock delivered stunning gains of 433% since the start of 2023. However, they have retreated 51% since the beginning of March. That may seem a bit surprising at first given that Supermicro has been recording outstanding growth in its revenue and earnings thanks to the booming demand for its AI servers. However, Supermicro has been accused by Hindenburg Research of accounting manipulation, and the server specialist's announcement that it would be delaying its annual filing with the Securities and Exchange Commission (SEC) also added to the bearishness around the stock that has crashed significantly of late. So, Supermicro's uncertain outlook makes it a risky investment right now. But there's a solid alternative in the form of Dell Technologies (DELL -1.74%) for investors looking to capitalize on the growing demand for AI servers. Dell released fiscal 2025 second-quarter results (for the three months ended Aug. 2) on Aug. 29. The company's top line increased by 9% year over year to $25 billion, along with a similar increase in adjusted earnings to $1.89 per share. The numbers were better than consensus estimates of $1.70 per share in earnings on $24.1 billion in revenue. The server and computer hardware specialist's better-than-expected results were primarily driven by the 38% year-over-year increase in its infrastructure solutions group (ISG) revenue to a record $11.6 billion. Dell's revenue from sales of servers and networking equipment jumped an impressive 80% year over year to a record $7.7 billion. The company sold $3.1 billion worth of AI servers last quarter. Dell also points out that it is witnessing "an increase in the number of enterprise customers buying AI solutions each quarter," which explains why its AI server orders increased by 23% sequentially last quarter to $3.2 billion. As a result, the company ended the quarter with an AI server backlog of $3.8 billion, and management points out that its potential AI server-sales "pipeline has grown to several multiples of our backlog." More importantly, Dell believes that it is sitting on a huge multibillion-dollar total addressable market (TAM) for its hardware and services thanks to AI. The company estimates that its TAM could grow at a 22% annual rate through 2027 to $174 billion, up from $79 billion last year. Additionally, Dell points out that it controls 26% of the server market, which means that it is in a nice position to capitalize on the secular end-market growth opportunity. This also explains why Dell's outlook for the current quarter points toward an improvement in its performance in the same period last year. The company anticipates fiscal Q3 revenue to increase 10% year over year at the midpoint to $24.5 billion. For comparison, its top line was down 10% year over year in the same quarter last year. Dell is also anticipating fiscal 2025 revenue to increase 10% at the midpoint to $97 billion. That would be a big turnaround when we consider that its top line in fiscal 2024 fell by 14%, while non-GAAP earnings fell by 6% to $7.13 per share. For comparison, Dell is forecasting a 9% increase in its earnings in fiscal 2025 to $7.80 per share. What's more, analysts raised Dell's revenue expectations this year thanks to its AI prospects, but there is a good chance that it may be able to grow at a faster pace thanks to its solid backlog and the long-term opportunity in the AI server market. We already saw that Dell is forecasting its earnings to increase in the high-single digits this year. The good part is that its bottom-line growth is expected to switch into a higher gear from the next fiscal year. Given the company's valuation, investors should consider buying Dell hand over fist right away before its improved earnings power sends the stock soaring. Dell is trading at 21 times trailing earnings and 15 times forward earnings. The Nasdaq-100 index has an average price-to-earnings ratio of 31 and forward-earnings multiple of 29 (using the index as a proxy for tech stocks). Assuming Dell's earnings do jump to $10.91 per share after a couple of fiscal years and it continues to trade at 21 times earnings at that time, its stock price could hit $229. That would be nearly double its current stock price. However, it won't be surprising to see Dell stock delivering stronger gains if the market decides to reward it with a richer valuation on account of its AI-fueled growth, which is why investors may want to buy this AI stock before it becomes expensive.