Super Micro Computer Faces Challenges as Revenue Forecasts Decline

After a significant drop in its shares due to disappointing fiscal third-quarter results, Super Micro Computer (NASDAQ: SMCI) experienced another decline following its full results and weak guidance.

This year has been tumultuous for the Stock, which currently hovers near breakeven. However, it has plummeted nearly 50% since mid-February.

Recent Performance and Historical Context

Initially, Supermicro’s stock rallied after the company filed its annual reports, potentially resolving an ongoing accounting saga. A short-seller had accused Supermicro of manipulating its accounting. Subsequent delays in annual reporting and the resignation of its auditor only compounded these issues. The Securities and Exchange Commission (SEC) had previously fined the company over accounting irregularities, which further tarnished its reputation.

Despite the earlier rally, Supermicro’s operational issues persist. It has a history of lowering its fiscal-year guidance. For instance, in November, the company revised its fiscal first-quarter revenue projection to a range of $5.9 billion to $6 billion, down from $6 billion to $7 billion. Similarly, in February, it warned that fiscal Q2 revenue would not meet expectations.

Moreover, Supermicro has grappled with declining gross margins. In fiscal Q4 ending June 2024, margins fell to 11.3%, compared to 17% a year prior. The company attributed this drop to price reductions made to secure new design wins, complicating profit generation from revenue.

Ongoing Issues

With recent Q3 results and guidance, Supermicro’s challenges continue. Revenue increased by 19% to $4.6 billion but missed earlier expectations of $5 billion to $6 billion. The fiscal Q4 guidance of $5.6 billion to $6.4 billion also fell short of the $6.82 billion consensus from analysts at LSEG.

During its pre-announcement, Supermicro noted that customers were delaying platform decisions, pushing potential sales into fiscal Q4. The company later clarified that this delay was due to clients evaluating the differences between Nvidia‘s Hopper and Blackwell graphics processing units (GPUs).

However, with fiscal Q4 forecasts below estimates, it seems insufficient sales were moved into its upcoming quarters. The company anticipates these will reflect in the June and September quarters. Additionally, it cited tariffs and macroeconomic uncertainty as factors for its cautious outlook.

Gross margins remained problematic, dropping to 9.6% for the quarter. Operating as a hardware integrator involves navigating a highly competitive, low-margin environment. While Supermicro adds value through customized server solutions, much of its revenue relies on expensive components like GPUs.

The significant decline in gross margins over the past year and a half is particularly concerning. The company projects gross margins around 10% in fiscal Q4, signaling limited short-term recovery potential. It attributes current margin pressures to GPU transitions and heightened price competition among older platforms, exacerbated by tariffs.

Image source: Getty Images.

Investment Considerations

Despite overcoming past accounting accusations, Supermicro continues to face substantial challenges. Revenue growth expectations have dropped consistently over the past year, accompanied by dwindling gross margins.

The Stock now appears undervalued, with a forward price-to-earnings ratio below 9x based on fiscal-year 2026 analyst estimates. However, it remains uncertain whether these estimates may need to be revised, as fiscal 2026 guidance has not been provided.

While Supermicro could benefit from increased spending on artificial intelligence (AI) infrastructure, it’s essential to note the company’s low-margin business model. In contrast, companies like Nvidia boast gross margins exceeding 70% and a significant technological advantage.

Overall, to effectively engage with the AI infrastructure sector, it’s prudent to consider investments in companies with robust technology and healthy margin profiles—criteria that Supermicro currently does not meet.

Should You Invest in Super Micro Computer?

Before purchasing Stock in Super Micro Computer, take note of the following:

The Motley Fool analyst team has recently identified what they believe are the 10 best stocks to buy now, and Super Micro Computer was not included in this list. The stocks that made the cut are expected to deliver significant returns in the coming years.

Geoffrey Seiler 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 those of the author and do not necessarily reflect those of Nasdaq, Inc.