Billionaire Jeff Yass just increased his position in this dirt-cheap artificial intelligence (AI) stock by 148%. Here are 3 things smart investors need to know.
Each quarter, investment firms managing more than $100 million file a Form 13F with the Securities and Exchange Commission (SEC). I find the 13F to be a valuable tool because it breaks down in detail what stocks institutional investors are buying and selling, and it can be interesting to try to identify patterns among Wall Street’s biggest money managers.
One investor I like to follow is Jeff Yass, the co-founder of Susquehanna International Group (SIG). During the second quarter, SIG purchased approximately 5 million artificial intelligence (AI) shares. Super microcomputer(NASDAQ: SMCI) — increasing his position in the company (aka Supermicro) by 148%.
Below, I’m going to break down the mechanics of Supermicro’s place in the AI world and discuss some key topics to consider when investing in the company.
Supermicro is often discussed among semiconductor companies such as Nvidia or Advanced micro devices are mentioned. For this reason, many investors consider Supermicro to be another chip stock, but in reality this is not the case precisely right.
Supermicro is an IT infrastructure company that specializes in designing storage architecture for Nvidia and AMD’s graphics processing units (GPU). So while chip industry demand has a direct impact on Supermicro’s business, the company itself isn’t a true semiconductor stock.
While Supermicro has undoubtedly benefited from AI’s tailwinds, the financial profile below paints a pretty sobering reality.
SMCI Sales (Quarterly) Chart
Supermicro’s gross profit margin is developing in the wrong direction. Despite the consistent acceleration in revenue figures, Supermicro’s economics are quite retarded.
While management has said these headwinds will be short-lived, the reality is that IT infrastructure is not a high-margin sector. This dynamic brings me to my next important topic: competition and the risk of commoditization.
While Supermicro has cultivated respectable relationships with some of the world’s leading GPU manufacturers, these relationships are by no means exclusive.
Supermicro competes with numerous other companies offering IT architecture solutions, including Dell Technologies, Hewlett Packard Enterprise, LenovoAnd Cisco. These companies are much larger and more diverse than Supermicro, making them formidable rivals.
In general, companies are forced to compete on price when the same solution is offered by many players within the same industry. So while Supermicro’s management has forecast rising operating profits, I wonder how profitable the company will ever become as competition increases.
Image source: Getty Images.
I think the biggest issue investors need to be aware of when considering an investment in Supermicro is the allegations that Hindenburg Research has made against the company. Hindenburg is a short seller, meaning the company has a financial interest in a decline in its stock price.
SMCI chart
Since Hindenburg published his short report on August 27, shares of Supermicro had fallen 16%.
In summary, Hindenburg alleges that Supermicro’s financial controls and accounting practices may have been deliberately flawed. Considering that Supermicro ultimately postponed its annual report, it’s clear why some investors sold the stock and moved on. Almost as troubling is a report from the Wall Street Journal that the U.S. Department of Justice is looking into Hindenburg’s claims.
All this said, nothing of substance has yet come from Hindenburg’s accusations, and it appears the pronounced sell-off is rooted in fear rather than anything concrete.
Supermicro currently trades at a price-to-earnings (P/E) ratio of around 13.5. As the chart below indicates, Supermicro’s valuation metrics have deteriorated in recent months as speculation about the company’s future increases.
SMCI PE ratio (forward) chart
I understand that the allegations against the company could lead to panic selling. Meanwhile, the crowded competitive landscape makes Supermicro’s long-term profitability picture difficult to predict. Nevertheless, I see Supermicro remaining an important company in the world of IT infrastructure.
In the short term, I think Supermicro’s most obvious catalyst is the planned launch of Nvidia’s Blackwell GPU architecture. Furthermore, as companies continue to pour billions of dollars into AI infrastructure such as data centers, network connectivity solutions, and GPUs, I find it hard to believe that Supermicro is not well positioned in the long term.
While I understand the risks surrounding Supermicro, I view the decline in the company’s valuation as a rare opportunity to acquire shares of a growth stock at a more reasonable price.
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Adam Spatacco has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Cisco Systems, and Nvidia. The Motley Fool has a disclosure policy.
Billionaire Jeff Yass just increased his position in this dirt-cheap artificial intelligence (AI) stock by 148%. Here are 3 things smart investors need to know. was originally published by The Motley Fool
