Super Micro Computer’s Volatile Stock Performance: A Cautious Outlook

The volatility surrounding Super Micro Computer (NASDAQ: SMCI) continues to make headlines. In the past five years, the computer rack assembler for artificial intelligence (AI) data centers saw its stock surge by over 4,000% at one point. However, the stock plummeted nearly 90% last year. Recently, it has regained some value, but remains 62% below its all-time high. Currently, the company holds a market capitalization of $26.7 billion, significantly down from a peak of $67.2 billion.

With AI data center spending on the rise, some investors may wonder if now is the right time to buy the stock.

Building the Infrastructure for AI

The demand for advanced computer chips is surging due to the rapid expansion of AI infrastructure, with companies like Nvidia and Advanced Micro Devices at the forefront. Super Micro Computer acts as an intermediary, purchasing chips and applying its expertise in rack assembly and energy-efficient innovations to enhance data centers for major cloud computing players and other AI-focused companies.

This transition has elevated Super Micro Computer from relative obscurity to a vital player in the market as companies strive for optimal performance from their computer chips and energy use. The company’s revenue has skyrocketed to over $20 billion, up from $3.34 billion in fiscal year 2020. Analysts project that AI infrastructure spending will continue to grow, providing a favorable outlook for Super Micro Computer.

Image source: Getty Images.

Challenges: Low Margins and Short Seller Concerns

Despite its growth potential, Super Micro Computer faces significant challenges. It operates in a space dominated by powerful suppliers and customers. Nvidia, a primary supplier, wields substantial pricing power, while customers like Microsoft Azure and Amazon Web Services (AWS) also hold significant negotiating leverage. This pressure is reflected in Super Micro Computer’s gross margin, which has dwindled to 11.27% over the past year, with an operating margin of just 6%, despite revenues exceeding $20 billion.

Additionally, a report by Hindenburg Research, known for identifying fraud at companies like Nikola Motors, signals potential concerns at Super Micro Computer, including questionable accounting practices. Following prior violations in 2020 and the return of executives from that period, investors should remain cautious.

SMCI Gross Profit Margin data by YCharts

Investment Considerations for Super Micro Computer

While Super Micro Computer’s revenue growth and position in the AI space are compelling, investors must acknowledge the risks tied to its cyclical industry. As growth in the AI sector may slow, the company’s fortunes could be adversely affected. Many cloud computing firms are moving to in-house solutions, which could further jeopardize Super Micro Computer’s future as the AI landscape matures.

Moreover, the company’s operating income of $1.3 billion, given the current AI boom, raises concerns when viewed against a market cap of $26.7 billion. The potential for diminishing earnings amid a downturn adds another layer of risk. Therefore, considering the prevailing challenges, Super Micro Computer may not be the best investment choice at this time.

Is Now the Right Time to Invest $1,000 in Super Micro Computer?

Before making a decision to invest in Super Micro Computer, potential buyers should also consider alternative options:

The Motley Fool analyst team recently identified what they believe are the top 10 stocks for investors. Super Micro Computer did not make this list, indicating that there may be more promising opportunities.

For instance, if you had invested $1,000 in Netflix when it made their list on December 17, 2004, it would have grown to $642,582! Similar results were seen with Nvidia after its inclusion on April 15, 2005, yielding $829,879 for a $1,000 investment.

It is worth noting that Stock Advisor boasts an impressive average return of 975%, outperforming the S&P 500’s 172% during the same period.

The views expressed here are those of the author and do not reflect those of Nasdaq, Inc.