After Super Micro Computer (SMCI 2.64%) reported its fiscal 2026 second-quarter results after the bell on Feb. 3, its stock price climbed immediately, as the report featured strong revenue growth and management upped its revenue guidance for the fiscal year. However, later in the week, the stock gave back much of its gains. Then it recovered again, and it remains volatile.
For those unfamiliar with Supermicro, the company designs and assembles servers and rack solutions for data centers, providing everything its customers need to get up and running. It's an important partner of Nvidia, and typically customizes its systems around the chipmaker's graphics processing units (GPUs).
NASDAQ: SMCI
Key Data Points
Gross margins in focus
While Supermicro's revenues have been growing rapidly, the company has been dealing with extreme gross margin pressure over the past couple of years. This pattern began in its June 2024 quarter, when its gross margin plunged from 17% a year earlier to 11.2%. Its gross margins have been spiraling ever since and hit a new low of 6.3% this past quarter, down from 11.8% a year prior and 9.3% in its fiscal first quarter.
On the bright side, management thinks its gross margins have reached the trough of this down cycle and anticipates that they will improve. Part of that improvement is expected to come from the increased adoption of its Data Center Building Block Solutions (DCBBS) products, which include management software and liquid-cooled infrastructure. Those products carry higher margins.
Also, despite the gross margin pressure, Supermicro is seeing both strong revenue and earnings growth. In its fiscal second quarter, its revenue more than doubled year over year to $12.7 billion, crushing the $10.4 billion analyst consensus estimate reported by FactSet. Adjusted earnings per share (EPS) climbed 17% to $0.69, besting the $0.49 consensus estimate.
Looking ahead, management projected that Supermicro's fiscal third-quarter revenue would be at least $12.3 billion, and raised its full-year revenue outlook to at least $40 billion, up from its prior forecast of at least $36 billion. It guided for fiscal Q3 adjusted EPS of at least $0.60 and for adjusted gross margin to rise by 30 basis points sequentially.
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Are Supermicro's gross margins a reason to avoid the stock?
The world is in the midst of the largest data center buildout ever seen. Yet Supermicro's gross margins have shrunk even as its revenue has soared. The reason is that it's essentially an intermediary that's getting squeezed between Nvidia and customers who are trying to keep costs in check. Meanwhile, until recently, Supermicro's offerings had relatively little differentiation from those of its rivals, and the data center server business is highly commoditized. Management is hoping that DCBBS, which it rolled out to customers late last year, can change that, but other innovations it has introduced, such as direct liquid-cooled servers, have generally not had much of a lasting effect.
As a low-margin business, Supermicro will be super-vulnerable to any AI spending pullback. As such, I think there are many better ways for investors to play the AI infrastructure boom.
