Super Micro Computer Faces Challenges Despite Stock Surge

Super Micro Computer‘s stock jumped over 30% on November 19 after the company announced a new independent auditor and provided a compliance plan to Nasdaq. These steps were crucial in addressing two major issues: the exit of its auditor Ernst & Young in October and a delayed filing for its 10-K report, which could lead to a stock delisting.

Despite this surge, Supermicro’s stock remains 76% lower than its peak earlier this year in March. The company’s shares are still under pressure due to worries about decreasing gross margins and stiff competition from larger server manufacturers like Dell Technologies and Hewlett Packard Enterprise. Adding to investors’ unease, a significant short seller has raised accusations of inflated revenues, and the Department of Justice (DOJ) is preparing to investigate Supermicro’s practices.

Image source: Getty Images.

Although Supermicro’s stock appears cheap at 8 times forward earnings, it is likely to continue trading at a discount until all accounting and regulatory matters are clarified. In light of these uncertainties, investors might find better opportunities in established AI stocks like Microsoft (NASDAQ: MSFT) and Broadcom (NASDAQ: AVGO).

Microsoft: A Leader in the AI Software Market

Over the past decade, Microsoft has seen a total return of more than 900%. This impressive growth, largely fueled by the rapid expansion of its cloud services, could have transformed a $100,000 investment into over $1 million.

After Satya Nadella became CEO in 2014, Microsoft shifted its focus from desktop software to cloud-based services and mobile applications. During this period, Azure emerged as the second-largest global cloud infrastructure platform, and the company diversified into hardware and gaming.

In fiscal 2024, which concluded in June, Microsoft’s pivot to AI-driven services led to a 23% increase in cloud revenues, reaching $135 billion—accounting for 55% of its total revenue. Analysts forecast a compound annual growth rate (CAGR) of 14% for revenue and 15% for earnings per share (EPS) from fiscal 2024 through 2027. With its stock trading at 28 times next year’s earnings, Microsoft is likely to remain a strong contender in the AI market for the foreseeable future.

Broadcom: Capitalizing on the AI Chip Market

Broadcom, formerly known as Avago before acquiring Broadcom in 2016, has achieved a staggering 2,300% total return over the last 10 years, turning a $50,000 investment into $1.2 million.

The company is renowned for its semiconductor products across mobile, wireless, networking, data storage, and industrial sectors. Recently, however, it significantly expanded its infrastructure software business through acquisitions including CA Technologies and VMware.

Both Broadcom’s chipmaking and software operations are on the rise. Over the last two years, demand for networking and optical chips designed for AI-focused data centers has surged as companies modernize their infrastructure. For fiscal 2024, which ended in October, Broadcom anticipates AI-related chip sales will nearly triple to $12 billion—about 25% of its total projected revenue. This growth should help compensate for the slower sales in non-AI chips and infrastructure software, which are more sensitive to economic fluctuations.

From fiscal 2024 to fiscal 2026, analysts estimate a CAGR of 15% for Broadcom’s revenue, with EPS projected to grow at an astounding 124%. This earnings growth is expected to be driven by robust sales of AI chips and the growth of its high-margin software division. Although the stock may seem relatively expensive at 42 times forward earnings, its history of strategic acquisitions and significant exposure to the AI market could justify the valuation.

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*Stock Advisor returns as of November 18, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends Broadcom and Nasdaq and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. 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.