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Super Micro Computer: 3 Reasons to Buy, 3 Reasons to Sell

Super Micro Computer (NASDAQ: SMCI), more commonly known as Supermicro, has been one of the market's hottest artificial intelligence (AI) stocks. Its close relationship with Nvidia granted it access to the chipmaker's top-tier data center GPUs before many of its competitors, and its sales of AI servers skyrocketed as more companies upgraded their data centers to process complex AI tasks. But over the past few months, Supermicro stock has tumbled more than 50%.

A large portion of that decline occurred on Aug. 7 after it posted a mixed fiscal fourth-quarter earnings report. Its announcement of a 10-for-1 stock split also didn't halt that precipitous decline. So should investors consider the steep pullback a buying opportunity? Let's review three reasons to buy Supermicro -- as well as three reasons to sell it.

An IT professional works in a server room.

Image source: Getty Images.

The key numbers

In the fiscal 2024 fourth quarter (ended June 30), Supermicro's revenue rose 144% year over year to $5.31 billion and narrowly beat analysts' estimates. Its adjusted earnings per share (EPS) grew 78% to $6.25 but missed the forecast for 130% growth.

That shortfall was mainly caused by a steep decline in gross margin, which management attributed to an unfavorable customer and product mix as well as higher development costs for its new direct liquid cooling solutions.

Metric

Q4 2023

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Revenue growth (YOY)

33%

15%

103%

201%

144%

Gross margin

17.0%

16.7%

15.4%

15.5%

11.2%

Adjusted EPS growth (YOY)

34%

0%

71%

308%

78%

Data source: Super Micro Computer. YOY = year over year.

For the first quarter of fiscal 2025, Supermicro expects revenue to rise 183% to 230% as adjusted EPS soars 95% to 141%. That matched analysts' expectations for 199% revenue growth and 121% adjusted EPS growth.

For the full year, Supermicro expects revenue to rise 74% to 100%, but it didn't provide a bottom-line forecast. Analysts expect revenue and adjusted EPS to increase 75% and 53%, respectively.

The three reasons to buy Supermicro

The bulls still love Supermicro for three reasons: Its stock looks undervalued, its market share is rising, and it has plenty of ways to expand its business.

At $509 as of this writing, Supermicro trades at just 14.8 times forward earnings. Its partner Nvidia, which is also growing like a weed as the AI market expands, has a forward multiple of 38.5. Supermicro is cheaper because it's still valued as a traditional server company -- like its larger competitors Hewlett Packard Enterprise and Dell Technologies -- instead of a high-growth AI stock. But if it proves its AI-driven growth spurt is sustainable, it could be revalued accordingly.

Supermicro only controls a low-single-digit share of the broader server market, but Bank of America estimates the company already controls about 10% of the dedicated AI server market. It also expects its share to grow to 17% over the next three years as the entire industry expands about 150%.

From fiscal 2024 to fiscal 2026, analysts expect Supermicro's revenue to grow at a compound annual growth rate (CAGR) of 44% as its EPS rises at a CAGR of 41%, thanks to those industry tailwinds. Such growth will be driven by its development of new liquid-cooled AI servers and the diversification of its portfolio with servers powered by AMD's cheaper AI chips.

The three reasons to sell Supermicro

On the other hand, bears believe Supermicro stock will slip as it grapples with competition, supply chain challenges, and macroeconomic headwinds.

First and foremost, Supermicro's partnership with Nvidia isn't an exclusive one. It established an early-mover advantage in the AI server market, but HPE and Dell have also been ramping up their production of their own Nvidia-powered AI servers. That competition could cause Supermicro's sales of AI servers -- which account for more than half of its revenue -- to slow.

Its growth also depends on its ability to secure a steady supply of data-center GPUs from Nvidia. It struggled with a shortage of Nvidia chips earlier this year, and management recently admitted the company could face other supply constraints in the future.

Lastly, unpredictable macroeconomic headwinds could abruptly throttle the expansion of the AI market overall. If the AI hype dies down because companies realize they aren't generating adequate returns on their investments in new generative AI applications, this red-hot market could fizzle out. If that happens, Supermicro could be revalued as a legacy server maker like HPE and Dell -- which currently trade at 9 and 12 times forward earnings, respectively.

Which argument makes more sense?

Supermicro faces near-term challenges, but its stock is remarkably cheap relative to its long-term growth potential. I believe its strengths outweigh its weaknesses, meaning its recent pullback looks like a golden buying opportunity.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, and Nvidia. The Motley Fool has a disclosure policy.

Super Micro Computer: 3 Reasons to Buy, 3 Reasons to Sell was originally published by The Motley Fool

Source: finance.yahoo.com

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