Investing.com — Shares of Super Micro Computer, Inc (NASDAQ:SMCI) fell on Wednesday after a downgrade from Barclays.
Shares of Super Micro Computer fell 3% in pre-market trading at 8:18 a.m. (12:14 GMT)
Barclays analysts have raised concerns about SMCI’s future prospects, leading to a downgrade to an equal-weight rating and a revised price target of $438. This is primarily due to the company’s declining gross margins, continued customer losses and internal control issues.
One of the key factors behind the downgrade is SMCI’s recent performance in terms of gross margins. In the June quarter, the company’s overall gross margin declined significantly to 11.3%, down 430 basis points from the previous quarter.
Gross margins for AI servers were reportedly in the high single digits, while margins for Dedicated Liquid Cooling (DLC) servers were even lower.
“MCI has been giving away DLC components for free to match or undercut Dell’s (NYSE:DELL) air-cooled rack prices,” analysts at Barclays said.
The pricing strategy, combined with supply chain constraints, has put pressure on margins, leading to concerns about a potential price-earnings ratio squeeze and a decline in investor confidence.
“SMCI has divested shares of its two largest clients: Musk entities and Coreweave (private, unsecured, except TSLA),” the analysts said.
Previously, SMCI had an exclusive supplier relationship with Musk Inc., but recent developments have resulted in the business being split equally between SMCI and Dell.
This shift has led to a decline in SMCI’s market share, from 100% in 2023 to around 50% in June 2024. Coreweave, another major customer, has also reduced its reliance on SMCI. Analysts attribute this trend to improved GPU supply and Dell’s strengthened competitive position.
These challenges are compounded by the uncertainty surrounding the new GB200 server platform. Barclays analysts are concerned that SMCI has a smaller market share in GB200 servers compared to its position with Hopper-based servers.
The expected lower margins for GB200 servers could put further pressure on SMCI’s profitability. In addition, the lack of firm customer orders for the GB200 platform increases uncertainty, especially as competition increases and margins may shrink.
Another concern for Barclays is SMCI’s internal controls and corporate governance. The delay in filing its 10-K report has raised red flags, highlighting issues with transparency and governance. SMCI’s lack of detailed financial disclosures, including quarterly order intake and backlog, has been a point of contention.
The company’s history of regulatory issues and previous Nasdaq listing have only added to these concerns.
In light of these factors, Barclays has revised its price target on SMCI to $438, using a valuation multiple of 12x FY25E EPS of $36.48. This new target more closely matches Dell’s valuation multiple, reflecting a more cautious stance given current margin trends and internal issues.
While Barclays remains bullish on the long-term prospects of the AI sector, it has identified Flex (NASDAQ:FLEX) as a preferred alternative investment. Flex’s increasing involvement in switch tray and power components for GB200 systems, coupled with its gains in Google’s (NASDAQ:GOOGL) TPU server assembly, make it a more attractive option in the current environment.
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