Super Micro Computer (SMCI -2.90%) has been in the doghouse on Wall Street, but the tide may finally be turning. After falling close to 90% from all-time highs the stock has bumped off the lows and is now up over 50% in the past month. The artificial intelligence (AI) beneficiary that builds computer racks for data centers operates in a rapidly changing sector, leading to wild swings in its stock price. It doesn't help that its profit margins keep moving in the wrong direction, either.
As of this writing, Super Micro Computer stock is still down 62% from all-time highs. Let's see whether this AI beneficiary is a cheap buy for your portfolio at current prices.
Fast revenue growth, slim profit margins
AI has supercharged growth for anything related to the advanced semiconductor and data center market in the past few years. Super Micro Computer serves a niche connecting these two fields by buying advanced computer chips and building computer racks ready-built to handle immense AI workloads. With technologies and innovations like liquid cooling systems, Super Micro Computer has been able to win customers by having these systems ready for deployment with high efficiency when it comes to things like electricity and air conditioning spend, which are important for data center deployment.
Last quarter, Super Micro Computer's revenue grew to $4.6 billion compared to $3.85 billion in the year-ago period. This was "only" 19% revenue growth but comes on top of 200% revenue growth in the same quarter a year ago. Super Micro Computer has gone from a tiny player in the computer rack assembly space to expectations for $21.8 billion to $22.6 billion in revenue this fiscal year ending in June.
That is a lot of revenue. One issue is holding up Super Micro Computer though: its deteriorating profit margins. A few years ago, Super Micro Computer's gross profit margin was closing in on 20%. Over the last 12 months, this has fallen to 11.27%, which shows the company's inability to raise prices on its customers buying data center products. Conversely, it shows that the power in the relationship sits with Super Micro Computer supplier Nvidia, which has consistently raised prices on its AI computer chips. As a middleman, the company is struggling to capture much of the value of the AI semiconductor and data center supply chain.
Image source: Getty Images.
Cyclical end markets and a short report
Explosive growth makes Super Micro Computer look attractive. Investors need to understand it operates in a cyclical sector -- semiconductors, data centers, and AI -- that goes through big up and down swings. AI spending has been in an upswing for years now but could easily head into a downturn if large technology players and the cloud players meet demand with enough supply.
In fact, we may be already seeing that occur with Super Micro Computer's gross profit margin. Margin compression is a sign that an industry is getting more supply to match demand, which can eventually lead to oversupply and a down cycle. It may not occur in 2025, but a down cycle will eventually hit the semiconductor market again as it has every decade since its inception.
Investors also cannot forget about the short report posted last year by now retired short-seller Hindenburg Research alleging potential accounting fraud at Super Micro Computer. It is unclear today whether Hindenburg Research was correct in its analysis of Super Micro Computer, but the short report presents another risk for the stock. Perhaps management is not being honest with Wall Street.
SMCI Operating Income (Quarterly) data by YCharts
The truth about Super Micro Computer stock
If you just looked at Super Micro Computer's earnings ratio, you might think the stock is cheap. It has a trailing price-to-earnings ratio (P/E) of 23.6, which looks like a bargain considering how fast Super Micro Computer has been able to grow its revenue.
Remember the sliding gross profit margin? This has led to falling bottom-line profits for the company in the last few quarters. Operating income was $145 million last quarter, which was less than half of what Super Micro Computer earned a year ago even though revenue was higher this quarter compared to 2024. Combined with the potential for a cyclical downturn, Super Micro Computer stock does not look as cheap as its current P/E ratio suggests.
The hard truth about this stock is that it is incredibly risky. There is a lot of upside potential if the company can keep growing revenue and regain its prior profit margin levels. But there is a ton of downside potential if industry spending dries up.
Avoid buying Super Micro Computer stock because of these downside risks.
