Alongside Nvidia, few companies benefited as much from the AI hardware boom as Supermicro Computer (NASDAQ: SMCI), a company that also specializes in data center equipment. But unlike Nvidia, Supermicro's boom came to an abrupt end -- sending the shares down by a whopping 61% from their all-time high of $119 reached in March.
Is the recent decline the beginning of the end for Supermicro, or is it a long-term buying opportunity? Let's dig deeper to see what the next three years could have in store for this beaten-down stock.
Supermicro's stock began to collapse in April, the same month it reported fiscal third-quarter earnings. While the company's revenue jumped 200% year over year to $3.85 billion, investors were alarmed by its gross margins, which narrowed to 15.4% from 17.6% in the prior-year period.
Gross margin represents the revenue remaining from selling a product after accounting for direct production and selling costs. And the negative trend continued in the fourth quarter when Supermicro's gross margin fell even further to 11.2% -- below analysts' expectations of 14.1%.
Gross margin can help investors measure a company's economic moat. Businesses with stronger moats tend to be able to charge higher prices and pass on more of their costs to consumers. A great example of this is Nvidia, which saw its gross margin widen from 75% to 78.4% in its most recent quarterly filing -- a sign that its customers don't have many good alternatives to its cutting-edge graphics processing units (GPUs).
Supermicro sells computer servers and liquid cooling systems that help turn these GPUs into data center-ready systems for consumers. It shares this business model with rivals like Dell and Hewlett Packard Enterprise.
Supermicro's management blames the margin erosion on competition and a tight inventory of key components. However, while it expects the supply chain constraints to ease by the end of fiscal 2025, investors should take that forecast with a grain of salt because this wouldn't fix Supermicro's more fundamental problem of a weak moat. It also won't address the growing legal uncertainty surrounding the company.
On Aug. 27, the well-known short-seller Hindenburg Research published an alarming report accusing Supermicro of several misdeeds, including accounting irregularities and dodging sanctions related to selling technology products to Russia amid its war with Ukraine. (Short sellers hope to profit by borrowing shares from a broker, selling them in the open market and profiting by buying them back for less to repay the loan.) Hindenburg cites international customs records and senior employee interviews.