The roller-coaster ride of volatility continues for Super Micro Computer (SMCI +1.38%) stock. At one point in the last five years, the computer rack assembler for artificial intelligence (AI) data centers was up over 4,000%. Last year, the stock fell almost 90%. Today, it has recovered some of these losses and has surged in the past month, but it is still off 62% from all-time highs. It sits at a market cap of $26.7 billion, down from an all-time high of $67.2 billion.
Super Micro Computer has been a big beneficiary of the booming spending on AI data centers. Does that mean you should buy the stock after its recent surge?
NASDAQ: SMCI
Key Data Points
Building data centers for AI
Infrastructure for the burgeoning AI space requires an immense number of advanced computer chips, typically from companies such as Nvidia or Advanced Micro Devices. One company that works as a middleman between these chipmakers and AI companies is Super Micro Computer. It buys computer chips and then uses its expertise in computer rack assembly and energy-efficient innovations to optimize data centers for the big cloud computing providers and other companies investing in AI.
This middleman has gone from a backwater in the industry to ever more important as companies try to juice more and more optimization out of their computer chips and electricity sources. It is no surprise, then, to see Super Micro Computer's revenue up to over $20 billion compared to $3.34 billion in fiscal year 2020. Explosive growth has propelled Super Micro Computer to new heights on the back of the AI revolution. With analysts expecting spending on AI infrastructure to surge over the next few years, bulls on Super Micro Computer stock can point to a rising tailwind for this leader in computer rack assembly.
Image source: Getty Images.
Low margins and scathing short report
One problem with Super Micro Computer: It is sandwiched between immensely powerful suppliers and customers. Its prime customer is Nvidia, which has a lock on AI computer chips and consistently implements price hikes on its customers like Super Micro Computer.
On the other side, you have customers like Microsoft Azure and Amazon Web Services (AWS), which have a ton of negotiating leverage as well. This issue shows up in Super Micro Computer's gross margin, which has fallen to 11.27% over the last 12 months. Operating margin was a slim 6% even though revenue was over $20 billion. Both sides of the supply chain have the power to squeeze Super Micro Computer on costs.
Another concern investors should be aware of is a short-seller report from the famous but now retired investment team at Hindenburg Research. The research team that identified fraud at Nikola Motors (now bankrupt) and many other companies sees problems at Super Micro Computer, including potentially misleading accounting. Super Micro Computer was charged in 2020 for accounting violations and has rehired executives from that era. While it is not 100% certain Hindenburg is right with this report, it does present another risk for shareholders who hold the stock today.
SMCI Gross Profit Margin data by YCharts
Should you buy Super Micro Computer stock?
There is an exciting narrative around Super Micro Computer stock. It has grown its revenue quickly and ridden the AI wave to new heights as one of the top computer rack assemblers in the industry. However, it is at the mercy of a cyclical industry with powerful players in its supply chain and customer base.
Growth in AI infrastructure may continue for a few years, but the rate of growth could easily slow down, which would hurt Super Micro Computer's growth prospects. Many times, cloud computing companies skip using Super Micro Computer's services and take these costs in house, which could be a risk to the company over the long term, especially if this frantic AI demand normalizes. Super Micro Computer specializes in quickly getting efficient computer racks up and running. This is less valuable the more and more the AI industry matures.
Plus, it isn't earning that much money right now in the first place. Operating income was $1.3 billion over the last 12 months even in an AI boom. This figure doesn't look wildly expensive versus a market cap of $26.7 billion, but there is a major risk that Super Micro Computer's earnings tank in a cyclical downturn. We cannot forget the short report, either. With slim gross margins, suppliers with tons of negotiating leverage, and the risk of a cyclical downturn, I don't think Super Micro Computer is a good stock for investors to buy right now.
