Supermicro’s Stock Decline: Short-Term Setback or Long-Term Opportunity?
Supermicro Computer (NASDAQ: SMCI) has experienced a dramatic fall in stock value, dropping 61% from a peak of $119 in March. While the company thrived during the AI hardware boom alongside Nvidia, its recent performance raises questions. Is this decline a signal of deeper issues, or could it represent a prime buying opportunity? Let’s explore the potential of Supermicro in the next few years.
What Caused the Decline at Supermicro?
Supermicro’s decline began following its fiscal third-quarter earnings report in April. The company celebrated a remarkable 200% increase in revenue, totaling $3.85 billion year over year. However, a concerning drop in gross margins—sliding from 17.6% to 15.4%—alarmed investors.
Gross margin is the profit left after deducting costs of production and sales. This downward trend persisted into the following quarter as margins further shrank to 11.2%, significantly lower than the expected 14.1%.
Understanding gross margins allows investors to gauge a company’s ability to manage its costs and pricing. For example, Nvidia reported an expansion in gross margins from 75% to 78.4%, reflecting a strong competitive position and limited alternatives for customers seeking advanced graphics processing units (GPUs).
Supermicro, which provides computer servers and cooling systems for data centers, competes with companies like Dell and Hewlett Packard Enterprise.
Increasing Challenges from Politics and Legal Issues
Supermicro’s management attributes the decline in margins to increased competition and supply chain issues. Although the company expects these troubles to resolve by the end of fiscal 2025, the underlying problem of a weakened competitive position remains. Additionally, legal uncertainties threaten to complicate its future.
On August 27, short-seller Hindenburg Research released a report containing serious allegations against Supermicro, including accounting irregularities and claims of violating sanctions related to technology sales to Russia during its conflict with Ukraine. Such reports can significantly impact investor sentiment.
Image source: Getty Images.
Although Supermicro has denied the allegations, stating the report contains inaccuracies, a recent report from the Wall Street Journal disclosed that the Justice Department is investigating these claims. Regardless of any eventual vindication, these accusations could linger, impacting investor confidence and the company’s market valuation.
Should Investors Consider Buying Supermicro Stock?
Supermicro is currently grappling with various challenges, including competitive pressures, declining margins, and potential legal issues. However, its valuation has become quite attractive, raising the prospect of a potential investment opportunity.
Supermicro’s forward price-to-earnings (P/E) ratio stands at just 14.6, considerably below the average of 24 typically seen in the S&P 500 index. This low valuation does not seem justified given the company’s impressive growth rate, which exceeds triple digits annually. The stock could outperform the broader market over the next three years if conditions improve.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
