Super Micro Stock: Proceed With Caution
Super Micro Computer stock (NASDAQ:SMCI) fell approximately 11% on Tuesday after the company released preliminary results for its March quarter that significantly underperformed expectations. The server manufacturer is now expecting revenue between $4.5 billion and $4.6 billion, a considerable drop from its previous guidance of $5 billion to $6 billion. Earnings per share are also anticipated to be well below predictions, ranging from $0.29 to $0.31 per share. Super Micro has blamed the miss on 'delayed customer platform decisions,' which resulted in some orders being postponed until the next quarter. However, the extent of the shortfall does raise apprehensions about broader demand trends and may indicate a potential loss of market share for Super Micro Computer to competitors like Dell Technologies.
The U.S. economy contracted in the first quarter of this year, and the outlook seems increasingly difficult. President Donald Trump's suggested tariffs on major trading partners are starting to take effect, heightening the risk of renewed inflation. The AI sector could be particularly susceptible to budget reductions during an economic downturn, as AI investments are still unprofitable for most companies. Export restrictions might also exert further pressure on U.S.-based server manufacturers like Super Micro. There is a chance that after years of substantial investment in AI infrastructure, companies could begin to emphasize the efficiency of their code rather than strictly increasing computing power. (Related: Should DeepSeek R2 Worry Nvidia Investors?) Back in February, Super Micro anticipated that fiscal 2026 revenue might hit $40 billion, representing a 70% increase compared to FY'25. Nevertheless, these projections may be challenging to meet given the escalating macroeconomic challenges and the company's recent earnings setback.
Currently, there are some positive aspects for Super Micro stock as well. Super Micro's server products are closely linked to Nvidia's GPU ecosystem, and with Nvidia increasing production of its new Blackwell chips, demand for SMCI's server platforms might improve. The company is also making strides into the direct-liquid-cooled (DLC) server market, recognized as a crucial technology for managing compute-intensive AI workloads. Additionally, the company's valuation remains appealing. SMCI is trading at approximately 13 times estimated earnings for 2025, which is significantly lower than the S&P 500's forward multiple of over 20 times. This valuation seems even more justifiable when considering the fact that revenue has grown at an annual rate of 74.5% over the past three years.
That said, investors should be cautious. Super Micro has encountered considerable controversy over the past year, including claims of accounting irregularities, delays in SEC filings, and scrutiny from short-sellers. Some of these issues have subsided in recent months, following the company's recent submission of its financial statements. However, the latest earnings miss, combined with a patchy history of corporate governance, indicates that investors may need to tread carefully with SMCI stock.
Investing in a single stock like SMCI carries risk. Conversely, the Trefis High Quality (HQ) Portfolio, which includes 30 stocks, has a history of comfortably outperforming the S&P 500 over the last 4 years. What accounts for this? As a collective, HQ Portfolio stocks have yielded better returns with less risk compared to the benchmark index, proving to be less volatile as seen in HQ Portfolio performance metrics.
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