Should You Buy the Dip in Super Micro Computer Stock?

Super Micro Computer, Inc. (SMCI) rode the artificial intelligence (AI) wave to massive gains, becoming a standout supplier of AI-processing servers. The stock soared to a record high of $1,229 in March, outpacing the broader S&P 500 Index’s ($SPX) returns thanks to its impressive revenue and profit growth.

But as investors took profits, the company's announcement of its first-ever 10-for-1 stock split, set for October, reignited interest in SMCI. Stock splits often act as magnets for investors, lowering share prices and making the stock more accessible to the broader investor base. Plus, historically, stock splits have led to an around 25% to 30% increase in share price, comparing very favorably with the S&P 500's average annual return of around 10% to 12%.

However, SMCI has been in the headlines for different reasons this week. A report from short seller Hindenburg Research rattled some nerves on Tuesday, and SMCI stock plummeted by 19% on Wednesday after the company delayed filing its annual Form 10-K with the Securities and Exchange Commission (SEC). 

Despite these concerns, some high-profile analysts remain cautiously optimistic on the AI server company. So, with SMCI stock hovering near year-to-date lows, is now the right time for investors to buy in ahead of the split? Let's take a closer look.

About Super Micro Computer Stock

Founded in 1993 and based in San Jose, Super Micro Computer, Inc. (SMCI) has grown into a $24.8 billion tech giant. Known for its liquid-cooling server and storage solutions, SMCI crafts everything from modular blade servers to advanced storage systems. Catering to enterprise data centers, AI, and cloud computing, the company blends innovation with tailored customer support, positioning itself as a leader in the tech infrastructure arena.

SMCI started the year strong, graduating from a small-cap Russell 2000 Index (RUT) component at the start of 2024 to a member of the S&P 500 in March and the Nasdaq-100 Index ($IUXX) by July. 

While SMCI shares are now down by nearly 64% from those March highs, SMCI remains up 56% in 2024 and 73.8% over the past 52 weeks, outperforming the S&P 500’s returns over both time frames.

From a valuation standpoint, Super Micro trades currently at a price-to-earnings (P/E) ratio of 21.52x, which is a discount to the tech sector median. Plus, with a price/earnings-to-growth (PEG) ratio of 0.69x, the stock could be undervalued relative to its future growth prospects.

Super Micro Drops on Q4 Earnings Miss

On Aug. 7, shares of Super Micro took a nosedive, closing over 20% lower following a weaker-than-expected fiscal Q4 earnings report. Although the company posted an impressive 143.6% annual revenue surge to $5.31 billion, slightly beating analysts’ expectations of $5.30 billion, its EPS of $5.51 missed estimates by 27.1%, despite year-over-year growth of 60.6%.

Super Micro’s gross margin tumbled to 11.2% from 17% a year ago and 15.5% last quarter. This decline stemmed from a greater share of lower-margin hyperscale data center business and higher costs for Direct Liquid Cooling (DLC) components. Operating margins also slid to 6.5% from 10.4%.

Adding to the woes, management warned of ongoing shipment delays due to supply chain issues and delayed shipments of Nvidia's (NVDA) Blackwell systems, which are crucial for Super Micro’s high-margin DLC solutions. This combination of problems could keep the pressure on margins in the near term.

However, Super Micro is eyeing a longer-term gross margin rebound, with supply chain hiccups that spiked component prices expected to smooth out over the coming year. Management is optimistic, pointing to reduced manufacturing costs from new facilities in Malaysia and Taiwan. Plus, they’re setting their sights on expanding in the Americas and Europe.

Looking ahead to fiscal Q1, management expects revenue to be between $6 billion and $7 billion, ranging from 183% to 230% growth, while non-GAAP EPS is anticipated to be between $6.69 and $8.27. For fiscal 2025, it anticipates $26 billion to $30 billion in revenue, which would be 74% to 101% annual growth.

Analysts tracking SMCI predict EPS of $28.50 in fiscal 2025, up 41.9% annually, with the bottom line projected to surge another 11% to $31.63 in fiscal 2026.

Is Super Micro's Growth Built on Sand?

Following the post-earnings sell-off, the cloud hanging over Super Micro Computer got a bit darker, with short seller Hindenburg Research raising serious concerns about Super Micro. The short-selling firm accused the firm of shady accounting practices, export control violations, and troubling customer issues, at the same time that it disclosed a short position on SMCI stock.

The server giant’s past brushes with regulatory issues are resurfacing, adding weight to the accusations of shady revenue recognition, questionable executive rehiring, and risky relationships with related parties.

Trouble began in 2018 when SMCI was delisted from the Nasdaq for missing financial filings. After a $17.5 million SEC settlement in 2020, Hindenburg claims the company slipped back into its old habits by re-hiring scandal-linked executives. The firm’s business partnerships with CEO Charles Liang’s brothers, who control critical suppliers, also raise questions about undisclosed transactions and self-dealing revenue practices. 

Adding to the uncertainty, reports suggest Super Micro might be skirting sanctions, with increased exports to Russia and customer service issues that are said to be driving away major clients like Nvidia, CoreWeave, and Tesla (TSLA).

If true, these issues could shatter Super Micro's reputation, adding serious risk. The uncertainty casts doubt on the stock's growth, potentially stirring volatility and leaving investors wary of the company's shaky future.

While investors more or less brushed off the initial release of the Hindenburg report, Super Micro's subsequent delay in filing its annual report for the fiscal year ended June 30 has raised more red flags, sending shares plunging. The stock’s recent volatility mirrors the mounting concern and uncertainty surrounding SMCI, which has now become one of the higher-risk plays in large-cap AI.

What Do Analysts Expect for Super Micro Stock?

A wave of reactions have rolled in from investment firms on SMCI this week. Wells Fargo (WFC) quickly responded, slashing its price target on the AI server company from $650 to $375, citing revenue recognition uncertainties and SMCI's checkered past. The brokerage firm says this target cut reflects a more conservative valuation, factoring in a 9x to 10x P/E based on SMCI's calendar year 2025 earnings estimates. Earlier in August, Wells Fargo had already trimmed their target after SMCI’s Q4 earnings.

JPMorgan (JPM) stepped in to defend Super Micro, arguing that the Hindenburg report offered "limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC, and limited new information relative to the existing and already known business relationship with related companies owned by the siblings of the founder of SMCI."

Overall, SMCI has a consensus rating of “Moderate Buy,” though the consensus has been growing less bullish over time. Out of 13 analysts in coverage, six rate the AI stock as a “Strong Buy,” six advise a “Hold,” and one recommends a “Strong Sell.”

The mean price target for SMCI is $922.54, which represents an upside potential of 108% from current levels. However, while the stock may have room to run higher from here, SMCI looks like a higher-risk play amid the company's accounting delay, so investors should carefully consider their own appetite for volatility before buying the dip.