Super Micro Computer (SMCI 1.45%) shares sank despite the company forecasting robust revenue growth for its fiscal 2026. Despite the drop in its share price, the stock is still up nearly 40% year to date, as of this writing.
The company designs and assembles servers and rack solutions for data centers that include everything a customer needs to get up and running, including networking and cooling systems. It typically customizes its systems around Nvidia's graphics processing units (GPUs), making it an important partner of the chipmaker.
Despite being at the center of the artificial intelligence (AI) infrastructure buildout, Supermicro has had its fair share of problems over the past couple years. While it has gotten past accounting accusations from a short-seller, an auditor resignation, and delayed filings, the company has still struggled forecasting revenue and with its gross margin. That was once again on display when it reported its fiscal first-quarter results.
NASDAQ: SMCI
Key Data Points
Gross margin and revenue forecasting problems continue
For the quarter ended Sept. 30, Supermicro's revenue sank 15% year over year to $5.02 billion, badly missing the $5.8 billion analyst consensus, as compiled by FactSet. It also came nowhere close to the $6 billion to $7 billion range the company forecast when it reported its fiscal Q4 results.
Just ahead of its earnings report, Supermicro lowered its revenue guidance to $5 billion, saying that some "design win upgrades" had been pushed out into the second quarter. However, this is not a one-time event, as the company has recently struggled with forecasting revenue.
The other big issue that the company has been dealing with is gross margin pressure. It started way back in its June 2024 quarter, when its gross margin plunged to 11.3% from 17% a year earlier, and still has not recovered. For the quarter, its gross margin continued to sink, falling to 9.3% from 13.1% a year ago and from 9.5% in fiscal Q4.
Meanwhile, Supermicro said its gross margin would remain under pressure in the near term due to the company ramping up new large-scale projects and making strategic investments. However, a low gross margin is an issue because it makes it more difficult to turn revenue into profits. This could also be seen in the quarter, with its adjusted earnings per share (EPS) plunging 52% to $0.35, which missed the $0.37 analyst consensus, as compiled by FactSet.
Supermico projected that fiscal Q2 revenue would come in between $10 billion and $11 billion, which was way ahead of the $7.8 billion analyst consensus. However, its adjusted EPS guidance of between $0.46 and $0.54 was below the $0.61 consensus.
The company raised its full-year revenue forecast to at least $36 billion, up from a prior outlook of at least $33 billion.
Image source: Getty Images.
Should investors buy the dip?
Supermicro's stock looks cheap on the surface. It trades at a forward price-to-earnings ratio (P/E) of 13.5 times based on fiscal year 2026 analyst estimates and a forward price/earnings-to-growth ratio (PEG) of below 0.4. Stocks with positive PEG ratios under 1 are typically considered undervalued.
For a stock that should be a big AI infrastructure build-out winner that just materially raised its revenue guidance, this would seem like a no-brainer, but it's not. The company has a terrible recent track record of accurately forecasting revenue, while its revenue growth hasn't been translating into strong profit growth due to its margin issues.
At the end of the day, Supermicro is in a low-margin, low-moat business that is seeing intense competition. At the same time, the company has had difficulty navigating GPU product transition cycles in the past, which could become an ongoing issue now that Nvidia is looking to introduce new GPU architectures each year.
Given its history, I prefer to stay on the sidelines.
