Shares have decreased by almost 40% in the past month alone. Super Micro Computer’s ( SMCI 8.60% ) The rocket-ship rally is collapsing, with shares plummeting to a level not seen since late January, erasing nearly seven months of progress quickly. The company is struggling due to lower profitability than anticipated. Let’s delve into what the upcoming year may bring.
Contents
Super Micro Computer’s underwhelming financial performance
A company may not necessarily be a good investment choice even if it is successful, as its valuation could already account for overly optimistic future prospects. Supermicro encountered this issue during its fourth-quarter earnings report.
Credit: Getty Images.
There was a 144% rise in net sales. year over year The company’s AI infrastructure drove a surge in demand, leading to a revenue increase to $5.3 billion. Analysts, however, were not satisfied with the results. earnings per share that have been modified or adapted Supermicro’s earnings per share (EPS) were $6.25, falling short of the expected $8.07. Despite the strong growth in Supermicro’s business, reduced gross margins have put a strain on profitability, decreasing from 17% to 11% compared to the previous year.
A moderately weak competitive advantage
Supermicro is recognized for transforming Nvidia’s (and other chip manufacturers’) technology. units for processing graphics By transforming GPUs into fully functional computer servers, the company has found a unique market opportunity. This has enabled them to benefit from the increasing need for AI chips, as more data center customers rush to expand their capabilities.
However, Supermicro’s intermediary business model is susceptible to risks. For starters, The company depends on extremely costly chip supplies from its partners. It is not clearly distinguishable from other companies that make servers. Dell Technologies is a multinational technology company. or HPE Implementing a comparable approach, these companies may pose a challenge for Supermicro. This may result in increased difficulty for Supermicro to transfer costs to customers or boost profits by raising prices.
Contrary to Supermicro’s partner Nvidia, which successfully raised its gross margin from 76% to 78.4% in the first quarter of its fiscal year by leveraging client commitment to its products through widely used software solutions such as CUDA (designed for Nvidia hardware) and a continuous update cycle to maintain a technological edge over competitors, the current scenario is vastly different.
Management attributed Supermicro’s lower-than-anticipated gross margins primarily to increased supply chain expenses and limited inventory. key parts. They anticipate this scenario to be resolved The company expects to see an increase in production by the end of fiscal 2025 as manufacturing partners accelerate their operations. However, this also underscores the continuous difficulty faced by the company. economic moat It may resurface at a later time.
What can we expect for Supermicro in the upcoming year?
The upcoming year are starting to take form This is a critical moment for Supermicro. The U.S. economy is facing challenges with rising unemployment rates and a slowdown in consumer spending. starts to slow down .
JPMorgan analysts forecast that there is a 35% chance of a U.S. recession happening by the end of the year. could cause significant damage to the AI industry.
Typically , when the overall economic situation deteriorates Businesses save money by reducing risky and unprofitable spending. AI algorithms intended for consumer use may fall into this group as they have difficulty in generating sufficient income or earnings to support the large investments required for their operation and development. Supermicro might be especially at risk during a decline as its operations are already under notable competition and profit margin challenges.
Do you think the stock of Supermicro is priced below its true value?
With a price-to-earnings ratio at a future date With a P/E ratio of only 14, Supermicro shares are remarkably inexpensive. S&P 500 The company’s average estimate is 22, whereas the market leader Nvidia has a higher estimate of 40. It is puzzling why a rapidly growing company is valued at a lower price compared to Nvidia, particularly if it can effectively manage its gross margins.
Having mentioned that, even though Supermicro offers an appealing discount, it is advisable for investors to exercise caution when considering investing in any AI-related stock at the moment due to the speculative and unverified aspects of the industry, as well as the increasing possibility of a U.S. economic downturn within the next year.
