Super microcomputer (NASDAQ: SMCI) has had an interesting 2024. It started the year as one of the most popular stocks to own, with its share price tripling in less than three months. Then the stock slowly fell after investors took profits, and Supermicro (as the company is often called) reported a poor earnings report. To make matters worse, Hindenburg Research, a famed short-selling firm, reported that Supermicro was involved in accounting fraud, prompting a Department of Justice (DOJ) investigation into the claims.
That’s quite a rollercoaster ride for Supermicro investors, and it’s sent the shares down significantly from their all-time highs. Could this be a million dollar investment idea? After all, Supermicro’s business is flourishing.
Demand for Supermicro’s products has been off the charts
The rise of Super Micro Computer is linked to the incredible demand for computing power in the field of Artificial Intelligence (AI). Supermicro makes components for servers and also sells complete server systems. The company’s products stand out from the competition because of their superior cooling technology: the most efficient servers are liquid cooled, eliminating the need to place these servers in large rooms to be cooled by expensive air conditioning.
According to Supermicro, this results in up to 40% energy savings and 80% space savings because the racks can be placed closer together because airflow is not as critical. This combination allows customers to fit more servers in a room, which is a major selling point.
The huge demand for its products has rapidly accelerated Supermicro’s business. In the fourth quarter of fiscal 2024 (ended June 30), Supermicro’s revenue rose 143% year over year to $5.3 billion. The company also provided strong guidance for fiscal 2025, with management expecting between $26 billion and $30 billion in revenue – growth of approximately 74% to 101%.
But management has a bigger vision than that. It believes it can grow its business to $50 billion in annual revenue. While this may seem like a lofty goal, this projection was $20 billion during last year’s Q4 results, and Supermicro’s 2025 expectations have already exceeded that level.
If that was the only piece of information investors had, Supermicro would probably still be one of the hottest stocks on the market, but there’s a lot more to this story.
Supermicro is not without its problems
A big red flag in Supermicro’s results is declining gross margin. This value has fallen to a ten-year low despite rising revenues. That’s never a good sign.
Management claims gross margin should increase throughout fiscal 2025 thanks to a more profitable product mix, production efficiencies in the liquid-cooled product line (its factories in Malaysia and Taiwan are still scaling up production), and new products. This will be an important thing for investors to watch as Supermicro’s profits could soar if gross margins improve throughout the year.
However, with accounting malpractice claims hanging in the air, some investors are worried they can’t trust anything from management. Well-known short-selling firm Hindenburg Research cited Supermicro’s past mistakes as the company paid a $17.5 million fine for accounting errors it made in 2018. To make matters worse, Supermicro also delayed the filing of its year-end Form 10-K this year. as it assessed the “design and operational effectiveness of its internal controls over financial reporting.”
That’s another potential weakness, and with the DOJ investigating it, the potential scandal could keep investors far away from Supermicro. I wouldn’t blame anyone, because there is a lot of risk in the stock. But there’s also plenty of reward if management’s projections come true and the DOJ investigation shows nothing wrong.
Supermicro is perhaps one of the cheapest stocks associated with the AI investing trend, trading for just 15 times forward earnings estimates.
If it makes it through these choppy waters unscathed, it is not unrealistic to think that it could fetch a bounty equal to that of the S&P500 (SNPINDEX: ^GSPC)which trades on average at 23.8 times forward earnings.
Super micro stocks come with a lot of risk, but the potential upside is there too. Will this stock make you a millionaire? Probably not. I’m talking about doubling or tripling the stock in the next few years, so unless you have a huge pile of money to put into it, it won’t work.
However, if you are interested in a small risk-adjusted position (Supermicro makes up about 1% of my portfolio), it has the potential to increase your long-term returns. This way, stocks can accelerate your path to becoming a millionaire.
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Keithen Drury holds positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is Super Micro Computer a stock for millionaires? was originally published by The Motley Fool
