After experiencing a promising start to the year, shares of Super Micro Computer (NASDAQ: SMCI) faced significant challenges due to a lackluster earnings report, scrutiny from a prominent short-seller, delays in annual 10-K filings, and a potential investigation by the Department of Justice (DOJ). However, following a press release revealing a boost in their shipment volumes, the stock experienced a notable rebound.
Supermicro recently announced that it is shipping over 100,000 graphics processing units (GPUs) every quarter, coinciding with the introduction of new cooling technology. This crucial update highlights their deployment of more than 100,000 GPUs equipped with direct liquid cooling (DLC) technology aimed at large data centers supporting artificial intelligence (AI) applications.
Understanding the role of Supermicro in the tech landscape is essential. Unlike companies like Nvidia, which design GPUs, Supermicro focuses on purchasing components, including GPUs, to create and assemble servers and racks for its clientele. Although they do not provide the same extensive support typical of branded servers like those from Dell, Supermicro offers these products at competitive prices. They’ve made a name for themselves by being early adopters of DLC, a technology critical for managing the heat generated by high-performance GPUs. Keeping these components cool is vital to prevent malfunctions and to optimize energy efficiency.
Interestingly, Supermicro’s pricing strategy for their DLC systems mirrors that of conventional air-cooled solutions, giving them a significant edge in the market. While Dell is beginning to adopt DLC technologies, Supermicro’s first-mover advantage places them in a favorable competitive position.
Nonetheless, while high GPU sales can potentially drive revenue growth, Supermicro’s profitability has been impacted by low gross margins. Recently, these margins fell to 11.2%, down from 17.0% in the previous year, particularly when compared to Nvidia’s impressive 75% margin and Taiwan Semiconductor’s 53%.
The question arises: can Supermicro’s stock maintain its upward trajectory? The company continues to navigate through a storm of challenges, including allegations of accounting manipulation and sanction violations brought to light by Hindenburg Research. Such claims have resurfaced memories of past scrutiny, particularly when the company settled with the SEC for $17.5 million without admitting wrongdoing. Moreover, there have been delays in filing their annual reports, particularly in light of the Hindenburg report, and the Wall Street Journal has indicated that the DOJ is looking into the firm, although neither organization has confirmed an active investigation.
Despite these underlying troubles, the surge in demand for AI infrastructure provides a silver lining. Large tech firms are investing heavily in GPUs, and Supermicro stands poised to benefit from this trend. Presently, the stock appears reasonably priced, trading at 14 times analysts’ estimates of earnings for fiscal 2025. While the valuation doesn’t suggest it’s a high-flying stock, the current growth opportunities in AI could position it as undervalued.
Looking ahead, potential for stock recovery is contingent on various factors, including resolving the uncertainty around its annual filing and the DOJ investigation. Therefore, investors should approach Supermicro with a balanced view, aware of the associated risks while also recognizing the potential for growth amid the AI boom.
For those who feel they may have missed previous investment opportunities in top-performing stocks, it’s worth noting that signs indicate favorable conditions for savvy investors. The tech sector, particularly AI-related infrastructure, can offer substantial returns if one capitalizes at opportune moments.
The landscape is changing rapidly, and for anyone keen on investing, keeping a close watch on developments within Supermicro could yield fruitful insights into the evolving dynamics of the technology market.