Server maker Super Micro Computer (SMCI 2.03%) shared the kind of update on Tuesday evening that growth investors usually celebrate. The company said it has received approximately $39 billion in orders for its advanced artificial intelligence (AI) servers from more than 20 customers in recent weeks. That's more than its total revenue over the past four quarters combined.
But the news came with a catch. To buy the components needed to build those servers, Super Micro plans to raise $7 billion by selling a combination of common stock and convertible preferred shares. Investors focused on the bill rather than the orders, sending shares down about 28% on Wednesday. In total, shares are now down about 37% over the last five trading days alone.
It's quite the reversal. The stock jumped 68% in May, and it has now given back a big piece of that gain in a single trading session. And the size of the financing helps explain the reaction: $7 billion equals more than a third of the company's entire market value of about $20 billion as of this writing.
Here's a closer look at the financing, why the company's thin margins make it so controversial, and whether the sell-off makes the stock worth buying.
Image source: Getty Images.
Big orders come with big bills
The financing now includes $5 billion of priced underwritten offerings: about $1.25 billion of common stock and about $3.75 billion of depositary shares (each representing a fraction of preferred stock that will automatically convert into common shares in 2029), before underwriters' options.
On top of that, Super Micro has entered into an at-the-market program that would let it sell up to $1.25 billion of additional stock over time, beginning as early as the third quarter. Notably, the company also cautioned that the $39 billion in orders don't constitute firm commitments and remain subject to cancellation and delays.
So why does a company with this much demand need to sell stock at all? Because building AI servers ties up enormous amounts of cash long before customers pay for the finished product. In its fiscal third quarter of 2026 (the period ended March 31), Super Micro used $6.6 billion of cash in operations and finished the period with just $1.3 billion of cash on hand. And after accounting for capital spending, the company's free cash flow for the quarter was negative by about $6.7 billion.
That cash intensity helps explain why management is turning to the equity market rather than waiting for profits to fund the build-out.
Thin margins raise the stakes
The financing might be less controversial if Super Micro earned more on each dollar of sales. The company's gross margin was 9.9% in fiscal Q3, up from 6.3% in the prior quarter. But the figure has been volatile, sliding from 9.3% in the fiscal first quarter to 6.3% in the second before recovering.
At last quarter's level, about 90 cents of every dollar of revenue went to component and manufacturing costs. Apply that to the order book, and $39 billion in orders may translate into less than $4 billion in gross profit -- while requiring tens of billions of dollars in spending to fulfill.
That math may be a big part of what spooked investors this week.
Management, for its part, believes profitability will rise over time.
"We are committed to achieving a sustainable double-digit gross margin model," said founder and CEO Charles Liang during the company's fiscal third-quarter earnings call last month.
In the near term, however, the company expects the figure to move the other way, guiding for a fiscal fourth-quarter gross margin of 8.2% to 8.4%.
None of this means there isn't a real growth story here. Super Micro's fiscal Q3 revenue of $10.2 billion rose 123% year over year, and non-GAAP (adjusted) earnings per share more than doubled. Indeed, the order book may say more about the strength of AI infrastructure spending broadly than any single data point this year.
NASDAQ: SMCI
Key Data Points
So, what does all of this mean for the stock?
Even after Wednesday's plunge, shares trade at a price-to-earnings ratio of about 18. That may not sound demanding for a company growing this fast. But the multiple is attached to a business with gross margins below 10% and billions of dollars of negative free cash flow. And a wave of new shares is on the way.
I'd stay on the sidelines here. The orders say remarkable things about AI server demand. But until Super Micro shows it can turn that demand into consistent profits without leaning on shareholders to fund it, the stock looks too risky to me -- even at this lower price.
