Super Micro Computer (SMCI +8.72%) has been through a whirlwind of ups and downs in recent months. Its stock soared 188% during the first half of 2024 due to excitement about the company's increasingly important role in the artificial intelligence (AI) economy. That run-up helped Super Micro secure a spot in the S&P 500 (^GSPC 0.11%) in March.
Tremendous share price appreciation also prompted Super Micro to schedule a 10-for-1 stock split for Sept. 30. The split will occur after the market closes, and shares will begin trading on a split-adjusted basis on Oct. 1. Interestingly, fellow AI company Nvidia also reset its soaring share price with a 10-for-1 stock split earlier this year.
However, Super Micro shares started falling when the company reported disappointing earnings in August. The sell-off worsened when Hindenburg Research accused it of wrongdoing later that month, and it worsened again following news of a Justice Department investigation this week. Shares are still up 35% year to date and 470% since January 2023, but the stock is down 65% from its record high.
Here's what investors should know.
NASDAQ: SMCI
Key Data Points
Super Micro is the market leader in artificial intelligence servers
Super Micro develops high-performance computing platforms optimized for applications like data analytics and artificial intelligence (AI). Its portfolio includes subsystems, individual servers, and full server racks equipped with compute, networking, and storage to provide clients with a turnkey solution for data center workloads.
What sets Super Micro apart are its manufacturing capabilities and modular approach to development. The company handles most production and testing internally at facilities in Silicon Valley, which supports rapid prototyping and product launches. Super Micro also uses common electronic building blocks to quickly assemble a broad range of products featuring the latest chips from suppliers like Nvidia, AMD, and Intel.
Rosenblatt Securities analyst Hans Mosesmann highlighted those advantages in a note to clients. "Super Micro has developed a model that is very, very quick to market. They usually have the widest portfolio of products when a new product comes out." Indeed, Super Micro CEO Charles Liang says the company typically beats competitors to market by two to six months.
That time-to-market advantage has helped Super Micro secure a leadership position in the AI server market. The company accounted for 10% of AI server sales in 2023, but that figure could reach 17% in 2026, according to Bank of America. That implies rapid revenue growth for Super Micro because AI server sales are forecasted to increase at 30% annually over the next 10 years, according to Statista.
Additionally, Super Micro also holds 70% to 80% market share in liquid-cooled servers, according to Charles Liang. Liquid cooling is more efficient that traditional air cooling, so the technology is expected to become increasingly popular as data center chips become increasingly powerful. Leadership in liquid cooling should reinforce Super Micro's strong presence in the AI server market.
Super Micro disappointed Wall Street with its fourth-quarter report
Super Micro reported mixed financial results in the fourth quarter of fiscal 2024 (ended June 2024). Revenue increased 144% to $5.3 billion on strong demand for AI servers. But gross margin fell about six percentage points to 11.2%, so non-GAAP earnings increased just 78% to $6.25 per diluted share. Investors saw declining margins as a sign Super Micro's pricing power was waning due to increased competition.
Importantly, management attributed margin contraction to the costly production ramp of direct liquid cooling (DLC) components. CFO David Weigand said, "We had to ramp up our supply chain. We paid a lot of expedite costs and higher supply chain costs." The company expects its gross margin to return to historical levels (between 14% and 17%) by the end of fiscal 2025 as liquid cooling solutions begin shipping in higher volume.
Hindenburg Research slammed Super Micro in a recent short report
In August, short-seller Hindenburg Research accused Super Micro of accounting manipulation and sanctions evasion. The analysts that authored the report claim to have uncovered "glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues."
Of course, short sellers have a vested interest in seeing a stock decline, but Super Micro subsequently delayed filing its Form 10-K and many analysts downgraded the stock. Samik Chatterjee at JPMorgan Chase wrote, "We see the report as largely void of details around alleged wrong doings." But he followed that insight with another note advising that new investors "remain on the sidelines till the company is back in compliance."
Importantly, Super Micro failed to file its Form 10-K for 2017 in a timely fashion. It took nearly two years for the company to correct the problem, during which it was temporarily delisted from the Nasdaq Exchange. The SEC ultimately fined Super Micro $17.5 million for recognizing revenue prematurely and understating expenses. So, the allegations made by Hindenburg come with an element of déjà vu.
The situation recently became more convoluted. On Sept. 26, The Wall Street Journal reported that the Justice Department is probing Super Micro. The impetus was a former employee who filed a whistleblower lawsuit against the company earlier this year. The lawsuit echoed certain allegations made by Hindenburg, including improper revenue recognition between 2020 and 2022. According to WSJ, the probe is at an early stage, and the situation could change rapidly as more news breaks.
Wall Street forecasts significant upside for Super Micro shareholders, but investors should be cautious
On the whole, Wall Street views Super Micro stock as undervalued despite the recent wave of downgrades. The median price target of $635 per share implies 39% upside from its current share price of $458. Analysts anticipate Super Micro's adjusted earnings will increase at 41% annually over the next two years, which does indeed make the current valuation of 20.7 times adjusted earnings look cheap.
However, that estimate could change as Wall Street unpacks the Justice Department's probe. Where the stock goes from here depends on how that situation unfolds, as well as Super Micro's ability to expand its gross margin. Given the uncertainty surrounding the company, I think investors should stay on the sidelines for now. But Nvidia remains a compelling stock to own.
