Super Micro Computer (SMCI 0.50%) has been through an interesting 2024. It started the year as one of the hottest stocks to own, tripling its share price in less than three months. Then, it slowly declined after investors took profits, and Supermicro (as the company is often called) reported a bad earnings report. To make matters worse, Hindenburg Research, a famed short-selling firm, reported that Supermicro was involved in accounting fraud, triggering a Department of Justice (DOJ) probe into the claims.
That's quite the roller-coaster ride for Supermicro investors, and it has left the stock significantly down from its all-time high. So, could this be a million-dollar investing idea? After all, Supermicro's business is booming.
Demand for Supermicro's products has been off the charts
Super Micro Computer's rise is tied to the incredible demand for artificial intelligence (AI) computing power. Supermicro makes components for servers and also sells complete server systems. The company's products are set apart from the competition by their superior cooling technology: Its most efficient servers are liquid-cooled, which eliminates the need to place these servers in large rooms to be cooled by expensive air conditioning.
According to Supermicro, this provides up to 40% energy savings and 80% space savings, as the racks can be placed closer together because airflow isn't as critical. This combo allows its customers to pack more servers in a room, and that's a key selling point.
NASDAQ: SMCI
Key Data Points
The massive demand for its products has rapidly accelerated Supermicro's business. In Q4 FY 2024 (ending June 30), Supermicro's revenue rose 143% year over year to $5.3 billion. The company also gave strong guidance for FY 2025, with management expecting between $26 billion and $30 billion in revenue -- about 74% to 101% growth.
But management has a larger vision than that. It believes it can grow its business to $50 billion in annual revenue. While this may seem like a lofty goal, this projection was $20 billion during last year's Q4 results, and Supermicro's 2025 guidance has already exceeded that level.
If that were the only piece of information investors had, Supermicro would probably still be one of the most popular stocks on the market, but there's far more to this story.
Supermicro isn't without its problems
One huge red flag in Supermicro's results is its declining gross margin. This value has leached to a decade-long low despite rising revenues. That's never a good sign.
SMCI Gross Profit Margin (Quarterly) data by YCharts
Management claims that its gross margin should tick up throughout FY 2025 due to a more profitable product mix, manufacturing efficiencies in its liquid-cooled product line (its factories in Malaysia and Taiwan are still scaling up production), and new products. This will be a key point for investors to watch, as Supermicro's profits could boom if its gross margin improves throughout the year.
However, with accounting malpractice claims in the air, some investors are worried that they cannot trust anything management says. Noted short-selling firm Hindenburg Research called out Supermicro's past mistakes, as the company paid a $17.5 million fine for accounting errors it made in 2018. To make matters worse, Supermicro also delayed its end-of-year form 10-K filing this year because it was assessing the "design and operating effectiveness of its internal controls over financial reporting."
That's another potential weakness, and with the DOJ looking into it, the potential scandal may cause investors to stay far away from Supermicro. I wouldn't blame anyone, as there's a lot of risk in the stock. But there's also a lot of reward if management's projections come true and the DOJ probe finds nothing wrong.
Supermicro may be one of the cheapest stocks associated with the AI investment trend, trading for a mere 15 times forward earnings estimates.
SMCI PE Ratio data by YCharts
If it gets through these choppy waters unscathed, it's not unrealistic to think that it could fetch a premium equal to that of the S&P 500 (^GSPC 0.61%), which trades at 23.8 times forward earnings on average.
Supermicro stock involves a lot of risk, but the possible upside is also there. So, will this stock make you a millionaire? Likely not. I'm talking about the stock doubling or tripling in the next few years, so unless you have a massive pile of cash to put into it, it won't do it.
However, if you're interested in taking a small position that's adjusted for risk (Supermicro makes up about 1% of my portfolio), it has the potential to boost your long-term returns. This way, the stock could accelerate your path to becoming a millionaire.
