Shares of server leader Super Micro Computer (SMCI +3.18%) rallied 11.3% in February, according to data from S&P Global Market Intelligence.
Super Micro had been a laggard among AI stocks over the past year and a half, as revenue growth has been lumpy and gross margins had pressured by competition. But with the stock trading at a cheap valuation entering the month, a solid beat in the December quarter and positive words about margin improvement going forward caused Super Micro to rise in February.
NASDAQ: SMCI
Key Data Points
Super Micro beats and provides upbeat guidance
In its fiscal second quarter ended in December, Super Micro delivered 122.8% revenue growth to $12.7 billion, with adjusted (non-GAAP) earnings per share up 16.9% to $0.69. Both figures beat expectations.
Not only did Super Micro beat expectations in December, but management also projected a better-than-expected March quarter, forecasting $12.3 billion in revenue and adjusted EPS of "at least" $0.60, compared with analyst projections of $10.2 billion and $0.52, respectively.
Super Micro had been expected to report strong growth, as a delayed build-out from a large customer from the prior quarter was anticipated to hit in December. Still, the December quarter revenue exceeded even those high expectations, as did next quarter's forecast. Management also projected fiscal 2026 revenue of at least $40 billion, up from the prior projection of at least $36 billion.
One fly in the ointment continues to be gross margins, which fell from 11.9% in the year-ago quarter and 9.5% in the September quarter to just 6.4% in December. While overall business growth enabled Super Micro to still grow gross margin dollars relative to last year, even at the lower margin, these lower margins have been the subject of scrutiny.
Management acknowledged the issue and outlined several ways it expects to improve gross margins over time. First, Super Micro's big revenue surge came from a particularly large order from a single customer, which provided 63% of total revenue in December. That's widely suspected to be xAI, which merged with SpaceX last month.
Given the high concentration in one customer and that customer's significant "prestige" in the tech/AI world, Super Micro appears to be giving Elon Musk a good deal on these massive orders.
Image source: Getty Images.
But going forward, CEO Charles Liang said the company is aiming to diversify its customer base, not only among large AI data center customers, but in the higher-margin enterprise server business as well. The AI landscape is now shifting from massive training clusters to enterprise and edge inference, so it's no surprise that Super Micro sees opportunity there. And diversification of customers should lead to better bargaining power.
In addition, Liang pointed to the company's new Data Center Building Block Solutions (DCBBS) as a way to improve margins going forward. This is a new end-to-end modular data center construction product enables Super Micro to achieve fast time-to-market and higher margins. Super Micro just rolled out this product last year, and Liang noted DCBBS only accounted for 4% of profit over the last two quarters. As DCBBS ramps up and makes up a larger share of total profit, margins should increase.
To that effect, management predicted a 30 basis point improvement in gross margins in the March quarter. While just a small improvement, it's nevertheless a positive change in trajectory.
Super Micro is among the cheapest of the AI stocks
Even after last month's rise, Super Micro trades at just 14.5 times 2026 earnings estimates, with the fiscal year ending in June, and then just 11.0 times fiscal 2027 estimates. That's very cheap on an absolute basis, and even cheaper relative to most AI stocks.
However, as anyone who has been following Super Micro knows, analyst projections can be off by a lot, given the lumpiness of Super Micro's business and the volatility in its gross margins. Yet if Liang's strategies to regain gross margin work, Super Micro should be able to beat those projections. If that's the case, then the stock is even cheaper than it looks today.
