Buy, Sell or Own Super Micro Computer Stock?

Super Micro Computer stock (NASDAQ: SMCI ) has seen significant volatility this year. Super Micro Computer is a data center solutions provider that sells server systems, server cards, storage, networking solutions, management software, and installation and maintenance services. SMCI stock has risen nearly eightfold over the past two years — from about $6 a share. stock in September 2022 to around $47 today, driven by strong demand for servers from AI data centers as well as the recent 10-to-1 stock split. However, the stock experienced a meaningful setback earlier this year amid concerns over gross margins, supply chain issues and a delayed 10-K filing following short-seller Hindenburg Research’s allegations of accounting irregularities. So is Super Micro stock a buy, hold or sell?

(Also check out “Should You Buy, Sell or Hold SNAP Stock at $12”)

In our latest analyses, we argued for a number of outcomes. On the one hand there is potential for the stock to rise over 2x to $1,000. On the other hand, we presented a counter-case that outlines Super Micro stock could fall to levels around $200 a share. stock.

Admirably, SMCI stock has generated better returns than the broader market in each of the last 3 years. The return on the stock was 39% in 2021, 87% in 2022 and 246% in 2023. In contrast, Trefis was High quality portfoliowith a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period.

Why is that? As a group, HQ Portfolio stocks outperformed the benchmark index with less risk; less of a roller coaster ride as it turns out HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around interest rate cuts and more wars, could SMCI see a strong jump?

Let’s start with the bad first

There is concern about whether demand can last. The underlying economics of the broader AI ecosystem are still questionable at this point, and most AI customers are still loss-making. Large language models are also expensive to build and train. We could be in an AI “FOMO” phase, where companies feel compelled to invest in AI simply because their competitors are. As Super Micro’s end customers seek better returns, we could see capital spending cooling, impacting growth. Additionally, most AI companies are currently in the compute-intensive training phase, and the demand for computing power and server equipment may cool as they transition to the less compute-intensive implementation phase. This could also hurt demand for Super Micro’s server systems, server cards, storage and networking solutions.

The concerns regarding corporate governance raised by Hindenburg Research warrant close attention, although the full extent of the problem is unclear. The short seller alleges that Super Micro may have engaged in improper revenue recognition, allegedly booked incomplete sales and bypassed internal controls. In addition, the company is accused of questionable relationships with related parties, especially suppliers connected to the CEO’s family. Hindenburg also highlights the rehiring of executives previously involved in previous scandals shortly after the company settled with the SEC. While these questions are troubling, more information is needed to fully assess the situation.

In addition, Super Micro’s margins are also vulnerable. Although net margins grew from 6% in FY’22 to around 9% in FY’24, driven by higher economies of scale, they could decline meaningfully if sales decline and competition increases, reducing the company’s volume and pricing power. Moreover, SMCI has seen its gross margins come under some pressure in recent quarters as it sells a higher mix of liquid cooling systems, which are proving expensive to produce, and this trend may continue as well. The server market is also highly commoditized. Although Super Micro has some competitive advantages as its products are seen to be more customizable, the company’s lead in these areas is hardly insurmountable and competition could increase significantly.

The good and the great

While the original AI models implemented by OpenAI in 2022 were largely text-based, the models are increasingly multi-modal, meaning they work with speech, images, video and 3D content – ​​requiring higher computing power and a greater number of GPU shipments . Furthermore, unlike a decade or so ago, when advances in computing power—particularly with processors—outpaced the development software that could fully exploit these capabilities, the demand for computing power in the AI ​​era has skyrocketed due to the intense computational demands of machine learning models. If compute demands continue to evolve higher, Super Micro could also see demand grow as enterprise infrastructure tools are needed to support the expansion.

The change in US monetary policy may also give SMCI an extra boost. The Fed’s 50 basis point cut – the first in nearly four years – brings the federal funds rate to 4.75%-5%, with room for further reductions. Lower rates boost growth sectors like technology by increasing the present value of future earnings. The interest rate cuts are particularly beneficial for SMCI. Why? Lower interest rates would reduce financing costs for builders of large data centers, potentially increasing capital spending in the space. Moreover, the economics of the AI ​​revolution remain mixed given the high costs of model training and inference. A fall in interest rates can improve the financial feasibility of these investments. Check out our analysis of other ways to profit from the Fed’s next move.

Although the server market is commoditized, Super Micro has some competitive advantages, as its products are seen as more customizable and more energy efficient than the competition. Super Micro’s customers are also increasingly choosing more premium products. For example, the company estimates that expensive liquid cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of the server racks it ships next year. The company is also steadily increasing its production capacity. For example, it is building a new facility in Malaysia that can produce over 5,000 racks of server sets every month. This gives the company the opportunity to scale up revenue in the long term.

So what should you do?

Answer: Add SMCI to your portfolio so that even if you envision a 5x gain in the long term, you are also willing to tolerate a 50% loss at any point during the ride. Yep, be willing to bear short term pain – the price you pay – to be rewarded in the long run. This sounds simple in theory, but is never easy to live up to in practice.

As investors cross their fingers for a soft landing for the US economy, how bad could it get if another recession comes? Our dashboard How low can stocks go during a market crash captures how key stocks performed during and after the last six market crash.

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