One of the most volatile stocks over the past year or so, Super Micro Computer (SMCI 1.05%) continued its habit of making big moves after its shares tumbled following the company's pre-announcement of poor fiscal Q3 earnings results. The stock has lost about two-thirds of its value over the past year.
The stock has been on a crazy roller-coaster ride ever since a short report came out questioning the company's accounting and accusing it of other misdeeds. The delay of its annual report, a reported investigation into the company by the Department of Justice, and the resignation of its auditor only added to the intrigue.
However, the company is now current with its filings and reporting full results, but it just looks like they will be disappointing. Below, I'll take a closer look at Supermicro's announcement to see if this could be a buying opportunity in the stock.
NASDAQ: SMCI
Key Data Points
Disappointing results
For those unfamiliar with Supermico, it's a hardware integrator that designs and assembles servers and rack solutions, which are fully configured systems that include networking, cooling, and power built in. It was one of the first companies in the space to offer direct liquid cooling (DLC) in its setups. Server hardware generates a lot of heat, especially when running artificial intelligence (AI) workloads, and DLC offers some nice advantages over traditional air cooling.
The company tends to build and customize its systems around Nvidia's graphics processing units (GPUs), and it's a key original equipment manufacturer (OEM) partner of the chipmaker. As such, it has benefited nicely from the artificial intelligence (AI) infrastructure buildout.
However, since the company is essentially a middleman integrator, its business has low gross margin. Despite the customization that it offers, it's in a commoditized field with low differentiation and intense competition. Meanwhile, it's passing on very expensive component costs, such as GPUs, that inflate revenue but don't add much to gross profit.
While Supermicro is in a notoriously slim gross margin business, it still has seen pressure on this front. This began showing up in its fiscal Q4 ending in June 2024 when its gross margin plunged from 17% a year ago to 11.3%. At the time, the company said that it had reduced prices in the pursuit of new design wins. For fiscal Q2, its adjusted gross margin remained strained, coming in at 11.9%.
For the company's most recent quarter, the gross margin problems didn't go away. In fact, they got worse. Supermicro said its gross margin would be 220 basis points lower than fiscal Q2, which would drop it to only 9.7%. This stemmed from the company taking increased inventory reserves on older-generation products and then rushing newer-generation products to customers.
Supermicro added that customers were delaying platform decisions, which moved sales into its fiscal Q4. As a result, it lowered its fiscal Q3 revenue forecast from a range of $5 billion to $6 billion to a new range of $4.5 billion to $4.6 billion.
It also lowered its adjusted earnings per share (EPS) forecast, taking it from $0.46 to $0.62 to $0.29 to $0.31. A year ago, the company reported adjusted EPS of $0.66 (split adjusted) on revenue of $3.85 billion. So sales growth would be 18%, while its EPS looks poised to decline.
| Metric | Prior FQ3 Guidance | New FQ3 Guidance |
|---|---|---|
| Revenue | $5 billion to $6 billion | $4.5 billion to $4.6 billion |
| Adjusted EPS | $0.46 to $0.62 | $0.29 to $0.31 |
Source: Company press release
At the heart of Supermicro's problems appears to be customers transitioning to Nvidia's new Blackwell chip. Blackwell remains capacity-constrained, but it appears customers are now more willing to wait for Nvidia's newest chip architecture than buy servers powered by older Hopper chips. This could lead to Hopper inventory piling up and future discounting.
This could be temporary in nature, but with Nvidia speeding up its new chip designs to about once every year, this dynamic could become a more common occurrence. Supermicro will have to learn to better manage its supply chain to more closely match inventory and demand in the future during these chip design transition periods.
Image source: Getty Images
Is the stock a buy?
With a forward price-to-earnings ratio (P/E) of under 12x this fiscal year's analyst estimates, Supermicro shares aren't expensive. However, given its low gross margin and the commoditized nature of its business, the company hasn't historically commanded a large valuation multiple.
Supermicro is still set up to benefit from the AI infrastructure buildout, but it's going to have to manage its current inventory and margin issues. Meanwhile, the stock is still carrying some baggage related to its short accusations and filing delay.
There are a lot of AI stocks on sale, given the recent market volatility. I think there are better ways to play the AI infrastructure boom.
