Super Micro Computer Faces Challenges Amid AI Shipping Surge

After starting the year strongly, shares of Super Micro Computer (NASDAQ: SMCI) have recently faced significant challenges. A disappointing earnings report, scrutiny from a prominent short-seller, and delays in its annual 10-K filing have raised concerns, especially with a possible investigation by the Department of Justice (DOJ) looming. However, the stock experienced a bounce back following a press release detailing its quarterly shipment volume.

In light of this situation, it’s worthwhile to explore the company’s announcement, its implications, and whether it may signal a recovery for the stock.

Quarterly Shipments Exceeding 100,000 GPUs

In a recent announcement about new cooling technology, Supermicro highlighted that it is currently shipping over 100,000 graphics processing units (GPUs) each quarter. The company specified it has implemented more than 100,000 GPUs with direct liquid cooling (DLC) solutions for major data centers focused on artificial intelligence (AI) applications.

Understanding Supermicro’s role is crucial here. Unlike Nvidia, which designs GPUs, or Taiwan Semiconductor, which manufactures them, Supermicro sources components like GPUs to build and assemble servers and rack solutions for customers.

While it doesn’t offer the same level of support as branded servers from Dell, its products are more affordable. Supermicro has also established itself in the market by being an early adopter of DLC, which is essential in keeping GPUs cool, enhancing performance, and saving energy.

To promote this efficient cooling technology, Supermicro maintains competitive pricing similar to standard air-cooled systems. Although Dell is also integrating DLC technology, it is in the early stages, giving Supermicro an advantage in this area.

While high GPU sales can increase revenue, Supermicro’s profit margins are relatively low due to minimal markups on these chips. The company has experienced pressure on its gross margins, which fell to 11.2% last quarter from 17.0% a year ago. For comparison, Nvidia’s gross margin was reported at 75%, and Taiwan Semiconductor’s was at 53% in their latest quarters.

Image source: Getty Images.

Potential for Stock Recovery?

Beyond margin pressures, Supermicro shares have been criticized due to allegations from Hindenburg Research, which points to accounting manipulation, sanction violations, and potential management self-dealing. In the past, the company settled with the SEC for $17.5 million over similar accusations, yet it did not admit to any wrongdoing.

Adding to the complications, Supermicro recently postponed its annual report filing after Hindenburg’s short report surfaced. Reports from The Wall Street Journal indicate that the DOJ is investigating the company regarding accounting matters, although neither party has confirmed this probe.

Despite these challenges, Supermicro appears to be capitalizing on the heavy investments flowing into AI infrastructure. While the company may lack a significant competitive advantage, it stands to gain as major tech firms aggressively seek GPUs in the ongoing AI race.

The stock currently trades at 14 times analysts’ fiscal 2025 earnings estimates. Although this isn’t a high price-to-earnings ratio, the potential growth in the AI sector may suggest that the stock is undervalued.

Data by YCharts. PE Ratio = price-to-earnings ratio.

The key question is what lies ahead for the stock. Several scenarios could lead to a price increase, yet Supermicro remains a risky investment due to uncertainties surrounding its annual report and the potential DOJ investigation. Caution is advised for prospective investors.

Seize This Potential Opportunity

Have you ever thought you missed the chance to invest in successful stocks? Now might be the moment you’ve been waiting for.

Occasionally, our expert analysts issue a “Double Down” stock recommendation for companies poised for growth. If you feel you’ve missed investing opportunities already, it’s crucial to act quickly before it’s too late. Consider these historical returns:

• Amazon: If you invested $1,000 when we doubled down in 2010, you’d have $21,266!*
• Apple: If you invested $1,000 when we doubled down in 2008, you’d have $43,047!*
• Netflix: If you invested $1,000 when we doubled down in 2004, you’d have $389,794!*

Currently, we are issuing “Double Down” alerts for three promising companies, and this opportunity may not come again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 7, 2024

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. 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.