Super Micro Computer is currently experiencing some short-term challenges that are impacting its stock value.
Typically, stock splits signal company strength, occurring when share prices become impressively high. Super Micro Computer’s (SMCI) impending 10-for-1 stock split is scheduled for October 1. Despite the positive connotation of a split, the stock has encountered difficulties since the announcement, falling approximately 32%.
While various factors contribute to this decline, none seem to warrant avoiding the stock for long-term investments, although potential investors should be cognizant of the associated risks.
### High Market Demand for Super Micro Computer’s Products
Super Micro Computer specializes in manufacturing data center components and constructing complete servers. This market has been robust in recent years, driven even higher by unprecedented demand for artificial intelligence (AI) capabilities. Companies are expanding their computing capacities swiftly, benefiting suppliers like Super Micro Computer significantly.
While facing strong competition, Super Micro Computer stands out with its customized full-server solutions and energy-efficient liquid-cooled technology, which lowers long-term operating costs. These advantages make Super Micro Computer a preferred choice for data center components and server construction, contributing to the stock’s strong performance this year.
However, the investment appeal of Super Micro Computer extends beyond its high-quality products.
### Factors Influencing Recent Stock Struggles
Since peaking in March, Super Micro Computer’s stock has been on a steady decline, partly because the earlier high expectations were unrealistic. As a result, current valuation levels may present an intriguing investment opportunity.
The recent downturn following the fourth-quarter earnings report (ending June 30) is due to two primary issues. First, Super Micro Computer’s gross margins have been declining for multiple quarters. Management attributes this to the launch of new products, including their liquid cooling technology, and expects margins to recover by fiscal 2025, reaching historical norms. Nonetheless, this short-term impact on profitability contributed to the immediate stock decline post-earnings.
Second, a report from Hindenburg Research, a prominent short-selling firm that benefits from stock price drops, accused Super Micro Computer of accounting malpractice. Previous SEC fines heighten the concern. Additionally, the company delayed filing its end-of-year Form 10-K with the SEC to assess its internal financial reporting controls. This delay undermines confidence in the company’s financial transparency, prompting some investors to sell off their shares.
While Super Micro Computer asserts that its financial results will not change, the delay underscores management’s need to address these issues seriously, assuming no financial discrepancies and refutation of Hindenburg’s allegations.
Adding to the situation, the U.S. Department of Justice has initiated a probe into Super Micro Computer following the Hindenburg report. The outcome of this investigation remains uncertain, increasing the investment risk until resolved.
These short-term factors have driven down the stock price, potentially creating a long-term investment opportunity, should the company be cleared of accounting malpractice allegations. The stock’s current forward price-to-earnings (P/E) ratio is about 12 times forward earnings, an attractive valuation, especially for a company projected to see revenue growth between 74% and 101% in fiscal 2025.
Improving margins combined with high demand for its products position Super Micro Computer for substantial returns if current concerns are resolved favorably.
Investors should remain cautious due to the ongoing government investigation. It’s not a reason to entirely dismiss the stock but should influence the scale of investment undertaken at this juncture.
