Excitement is building around Super Micro Computer (SMCI -0.88%) as the company recently announced preliminary numbers showing that its margins will be far better than expected for the current quarter. Its latest earnings numbers are set to come out on Aug. 11, and if margins are stronger and the business is still experiencing considerable growth due to artificial intelligence, then odds are, it'll be a fantastic quarter for the company.
Does this mean it's a good time to buy shares of Super Micro?
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Low margins have been a big problem for Super Micro
Investors should always pay attention to gross profit margins because they can make or break a company's hopes of profitability. Low margins mean the company's cost of goods sold is high relative to revenue, suggesting it may not be charging enough for its products and services. While low margins can still lead to profitability, the company needs to have high sales volumes and lean operations.
In recent years, Super Micro's gross margins have actually been worsening, which is an even more troubling sign for investors. Even though it has been generating more revenue, with lower margins, its bottom line hasn't shown nearly as much improvement.
SMCI Gross Profit Margin (Quarterly) data by YCharts
Last week, Super Micro released preliminary numbers for the fourth quarter (which ended on June 30), and its margins are going to be within a range of 15% to 17%, which is far higher than its guidance of around 8% and where its margins were last quarter (around 10%). It credits the improvement to the customer and product mix.
Is Super Micro's stock likely to soar after earnings?
After announcing the preliminary numbers, Super Micro's stock jumped to more than $30 -- the highest level it's closed at since late June. It wasn't a huge rally, and the stock is still only up around 3% for the year, but it is nonetheless a sign of renewed excitement around the business.
NASDAQ: SMCI
Key Data Points
While the news is encouraging, it may be wise to wait until after earnings to make a decision. I'd like to see more details about why its margins changed so drastically. The improvement is great, but the big question is whether it's sustainable and a sign of higher margins in the future, or if this will prove to be just temporary.
A single quarter is just that, and without understanding the full reasons behind the gross margin improvement and whether it's likely to continue, investors may still be better off waiting on the sidelines and taking a wait-and-see approach with the tech stock.
