Shares of Super Micro Computer (NASDAQ: SMCI) have been falling lately. Down more than 20% in just the past month, this once-hot artificial intelligence (AI) stock looks like it might have hit a peak. Despite the fact that the company has posted some impressive growth numbers and possesses attractive prospects, investors appear to be hitting the sell button of late.
But could there be a catalyst coming soon for the stock? Earlier this year, Super Micro Computer, also known as Supermicro, announced a significant 10-for-1 stock spilt. It will trade on a post-split basis on Oct. 1, and given how some splits have lifted stocks in the past, could this be a reason to hang on to the stock for the remainder of the year? Could it help rally the AI stock higher?
Will a split give Supermicro's stock a boost?
A stock split helps lower the price of a stock. In theory, it can help make the stock more accessible to a wider pool of investors, particularly those who don't want to own or who can't buy fractional shares of a business.
But a high price alone doesn't prevent a stock from climbing higher, otherwise Berkshire Hathaway Class A shares would have peaked a long time ago. Chipotle Mexican Grill also wouldn't have seen its share price rise to more than $3,000 before it deployed its massive 50-for-1 stock split earlier this year.
But regardless of the reasoning, there's no denying that splits can occasionally have positive effects on a stock's overall valuation. Even though it doesn't change anything to do with the underlying business, and a shareholder's total investment remains unchanged, a rally can often follow a stock split.
Recent stock splits, however, haven't been convincing of this. Chipotle split its shares a few months ago, and the stock has fallen 20%. Chipmaker Nvidia did a stock split in June as well, and it rallied a relatively modest 6% since then, which is tame by its standards.
Stock splits can help add fuel to a scorching-hot stock when the markets are rallying, but with fears of a recession looming, I'm not convinced that Supermicro's stock will be able to attain much of a benefit from its upcoming split.
Supermicro's light margins are likely weighing on the stock
While Supermicro's business has been growing quickly in recent quarters, investors might be getting concerned that the company's margins could be a bit light. The gross profit margin was just 11% in the most recent quarter (ending June 30), which is down from an already low rate of 17% in the prior-year period.
Supermicro doubling sales is great, but when margins are thin, that means a lot of that incremental revenue growth isn't making it down to the bottom line. That can be a sign that the company's prices are low and that perhaps it is discounting its products heavily for the sake of growing the top line.
At a time when AI-related spending is coming under more of a microscope, investors might be wary of buying Supermicro stock and paying more than 30 times earnings for it if the company's earnings won't grow at a high rate.
While the company still has attractive growth prospects because demand for its server solutions and storage products remains high, investors might not be comfortable with the stock's current valuation if margins don't improve.
Should you invest in Supermicro stock today?
Supermicro stock is one of the better valued AI stocks out there today. At just 18 times next year's earnings (based on analyst estimates), there's some good value there for investors.
The company is establishing itself as a leading provider of servers and AI-related infrastructure. While spending might slow down on AI during a recession, investors should take a page out of Warren Buffett's playbook and avoid investing based on economic forecasts.
If the business is doing well and dominating the market, it could still make for a good buy. And a low earnings multiple could help give investors some added incentive to buy the stock sooner rather than later.
While its upcoming stock split might not serve as much of a catalyst, Super Micro Computer stock can still be a good buy based on its own merits and fundamentals.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Will a Split Send Super Micro Computer's Stock Higher This Year? was originally published by The Motley Fool