Super Micro Stock Falls 23%: Falling Knife Or Buying Opportunity?
Competition Hits Revenue Growth
Over the most recent quarter, net sales came in at $5.8 billion. That's translates into a growth rate of just about 8% year-over-year, while net income per share stood at $0.31, down from $0.46 in Q4'24. Why is this happening? The company is witnessing intensifying competition in the AI server market from the likes of Dell, HPE, and Lenovo and this could be threatening growth rates and profitability. These larger rivals also boast broader portfolios, including proprietary technologies and software, as well as potentially stronger supply chains. This allows them to offer end-to-end solutions, from hardware to software ecosystems, which SMCI might not be able to match. Moreover, these companies may be the preferred choice for enterprises already invested in their broader IT infrastructure. Dell and HPE also provide more comprehensive global coverage, and they might be able to eventually outdo SMCI on both price and performance.
Margin Troubles
Gross margins have also been a major sore point for the company. While margins stood at close to 17% in Q4 FY'23, they fell to about 11% in Q4 FY'24 (June fiscal year) as the company noted that it was lowering prices in order to secure new design wins. However, there have been no signs of a margin revival despite rising volumes. Over Q4 FY'25, gross margin further declined to 9.5%. While the company says that costs are partly due to the shift in Nvidia's platform transition from Hopper to Blackwell AI chips, it should be noted that the server market is highly commoditized and competition will keep prices and margins in check.
Some of the company's recent margin contraction has been due to a rising mix of more costly liquid-cooling systems, which are crucial for AI workloads. While SMCI has resolved many technical challenges such as condensation in liquid cooling, the rollout remains costly. HPE, Dell, Lenovo, and others are also rolling out advanced and highly scalable liquid-cooling solutions, and this could also hurt SMCI's early edge. If margins remain this low, instead of driving earnings, SMCI could end up scaling a low-margin business without creating real value for shareholders. (Why Are SMCI Margins So Low?)
SMCI Not Delivering On Outlook
Investors may also be given to think that SMCI has been over-promising and under-delivering. SMCI has slashed its full-year revenue guidance twice in consecutive quarters, lowering expectations from an initial 87% revenue growth for the year to just 49%. The large downward revision indicating that the company has not been able to accurately size up demand. The company has also fairly consistently missed consensus earnings estimates in recent quarters, suggesting its overall growth trajectory may have been overestimated.
As we've noted in the past, investors must be cautious with investing in SMCI stock. Super Micro has faced significant controversy over the past year, including allegations of accounting irregularities, delays in SEC filings, and scrutiny from short-sellers. Although some of these issues have eased in the last few months following the company's recent filing of its financial statements, the mixed earnings and declining margins, coupled with a spotty track record of corporate governance, suggest that investors may need to proceed with caution on SMCI stock.
While it looks like there may not currently be too much upside to SMCI stock, the Trefis Reinforced Value (RV) Portfolio, has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.
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