When a stock is in the midst of a free fall, it can be a risky time to buy in. That's because it's hard to know if it has bottomed out or if it's still heading further down. It can seem like a cheap buy, but if the business is in trouble, it still may not be worth investing in it.
Super Micro Computer (SMCI +7.91%) was once seen as a top artificial intelligence (AI) stock. Its servers have been in high demand for companies looking to upgrade their tech capabilities, and it also provides businesses with crucial IT infrastructure. But in just the past six months, the stock, which is also known as just Supermicro, has nosedived more than 60%. Investors appear as though they can't get rid of the stock fast enough.
But could Supermicro's upcoming stock split help reverse its fortunes, and get its shares rallying again?
NASDAQ: SMCI
Key Data Points
What Supermicro's 10-for-1 split means for investors
Last month, Supermicro announced it would split its shares on a 10-for-1 basis. And Oct. 1 is when the stock will trade on a post-split basis. That means rather than trading at $400 or so per share, the stock price will be around $40 -- assuming it doesn't move a whole lot from where it is right now.
For investors, that's about the main difference they'll see. In your portfolio, your total investment value will remain unchanged, you'll simply have 10 times as many shares and the price will be one-tenth of what it was before the split.
But at a lower price, some investors may be more inclined to buy shares of the company, if for instance, they aren't able to own fractional shares, or if they just prefer not to. Beyond that, however, there isn't an obvious benefit to a stock split -- it's just a superficial change that shouldn't impact your decision to buy or sell Supermicro stock. Unless there's some drastically significant news that comes out on Oct. 1, the AI stock will be just as good or bad of a buy as it was the previous trading day.
Investors should focus on the fundamentals
For investors, what should always remain the focus are the fundamentals. Whether the business is growing at a fast rate, if it is profitable, and how strong its cash flow is are some of the more crucial things to look at.
Even the recent short report about the company isn't important. Those reports can be biased, misleading, and are often wrong on many if not all counts. While stock splits and short reports can have temporary impacts on a stock's price, they aren't likely to determine how it performs in the long run.
Supermicro has been a strong growth stock to own this year due to the strength of its business and high demand for its servers and other IT infrastructure. One area of concern, however, has been its low gross margin. Without higher margins, Supermicro's revenue growth may not result in a much stronger bottom line, and that could make the stock look expensive if its share price rises but its earnings per share doesn't increase significantly.
It's those types of things investors should factor into their decision-making process, as opposed to stock splits or short reports.
Should you buy Supermicro stock?
Investors shouldn't be down on Supermicro stock because of the recent short report, but they also shouldn't be terribly excited about a stock split, either. Although business has been booming with Supermicro's sales doubling in recent periods, I would wait a few quarters to see how the company is doing and if its margins are improving before making a decision on the stock. If they aren't improving, I would take a pass on the stock as a low gross margin can be a cause for concern.
But if you're willing to take on some risk and trust that the company can fix those issues, it may be worth adding the stock to your portfolio as it does trade at a fairly low 11 times its estimated future profits. That's an incredibly low multiple for a tech stock, and it could justify taking on the risk as the upside could be massive if Supermicro proves its doubters wrong. This isn't a stock that is going to be suitable for risk-averse investors, but if you have a high risk tolerance, it could be worth buying today -- there's no need to wait for October.
