The recent plunge investors have seen in Super Micro Computer (NASDAQ:SMCI) has been truly remarkable. Shares of the server and storage giant surged more than 1,200% during the recent AI boom but have since dropped more than 50% from their peak.
That said, there are reasons why many investors view SMCI stock as a strong contrarian bet. Now trading around 15x earnings, there’s a clear value argument that can be made for this provider of direct liquid cooling technology for server farms. The company appears to be well-positioned for long-term gains alongside AI and data center growth.
SMCI may be worth considering for long-term investors, but it’s wise to wait for improved margins before getting bullish. With market pressures and volatility affecting AI stocks, there’s a reason why some analysts are suggesting that this stock may be more of a hold than a buy right here.
Let’s dive into what the company’s outlook is moving forward, and whether now is the time to jump on this AI-adjacent play.
Missed Earnings
Supermicro Computer saw its fourth quarter (Q4) fiscal year (FY) 2024 gross margins fall to 11.2% from 17% due to supply chain issues. Despite this miss, the company’s attractive valuation, strategic growth plans, and potential for a future stock split make SMCI’s stock appealing. In recent trading days, SMCI stock has been all over the place, sinking below $500 per share before rebounding to around $550 at the time of writing. But again, the company’s current price-sales ratio of 2.5x and its forward price-earnings multiple are certainly enticing to a particular group of investors.
Super Micro has continued to expand aggressively, adding three new Silicon Valley facilities and boosting operations in Taiwan and Malaysia to meet rising AI and liquid-cooled data center demand. This expansion, which has resulted in a doubling of its AI SuperCluster capacity, aims to allow Super Micro to capture a larger market share in AI and cloud infrastructure. However, a 10-for-1 stock split is due on October 1, 2024, and it is expected to enhance liquidity for the company and attract more investors.
The company’s strategic positioning is what many investors clearly like. Strong partnerships and stable project pipelines make this data center/server play worth considering. The company is key in powering major AI factories, with high demand for its advanced air-cooled and DLC rack-scale AI GPU platforms.
Despite recent challenges, Super Micro’s temporary setbacks appear to present a buying opportunity. The company, well-positioned for AI growth, has strong valuation metrics and strategic expansion plans, including an upcoming stock split. Investors should research thoroughly and consider risks as market trends can shift unexpectedly.
New Data Center
Supermicro’s CEO Charles Liang revealed a new data center construction method that can halve build times. For Q4 and FY 2024, revenue surged to $5.3 billion and $14.94 billion respectively, with net income rising to $353 million and $1.2 billion. These figures marked a significant increase from last year’s results.
The company has faced challenges with high costs and component shortages for its direct liquid cooling (DLC) tech, affecting Q4 revenue by $800 million and margins. Despite this, Super Micro’s CEO Liang remained optimistic, citing planned increases in DLC rack production from 1,500 to 3,000 per month. He emphasized that DLC units, while costly upfront, save energy and reduce overall costs.
Supermicro expects FY revenue to reach $26–$30 billion, driven by growing demand and the new Supermicro 4.0 DCBBS. This rapid data center construction method, available by year-end, promises faster setup and lower costs. It integrates AI, server, storage, networking, and other components, with build times of six to twelve months for small or upgraded facilities and two years for new AI-capable data centers.
Be Careful, But SMCI Stock Is Starting to Look Attractive
Previously holding about 5% of the enterprise server market, Supermicro now dominates with 70-80% of recent DLC server shipments. This rapid growth in DLC, expected to surge from 1% to 30% of the market, could double Supermicro’s revenue to $26-30 billion in the next year.
Supermicro’s new data center building block solution, launching this year, aims to boost recurring revenue through added maintenance and software services. With lower costs expected from its upcoming Malaysian plant, the company’s investment in direct liquid cooling for AI data centers could significantly impact future profitability, despite current investor pressure for immediate gains.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.