After a strong start to the year, shares of Super microcomputer (NASDAQ:SMCI) are under intense pressure after a disappointing earnings report, unwanted attention from a notable short seller, the delay of the annual 10-K filing, and a possible investigation by the Department of Justice (DOJ). However, stock prices recovered after the company issued a press release citing quarterly volume.
Against that backdrop, let’s take a closer look at the company’s recent announcement, what it means and whether it could be the start of a bigger recovery for the stock.
Over 100,000 GPU shipments
As part of an announcement introducing new cooling technology, Supermicro’s press release headlined that it is currently shipping more than 100,000 graphics processing units (GPUs) per quarter. It clarified in the release that it recently deployed more than 100,000 GPUs with direct liquid cooling (DLC) solutions to a number of very large data centers built to power artificial intelligence (AI) applications.
Now it’s important to understand what exactly Supermicro is doing in relation to this statement. It doesn’t design GPUs like Nvidia or manufacture them as Taiwanese semiconductor. What it does is buy components, such as GPUs, and then design and assemble servers and rack solutions for customers.
The company does not offer the same level of support as branded servers Dellbut sells them at much lower prices. Supermicro also carved out a niche by being one of the first server companies to embrace DLC. GPUs generate a lot of heat, so they need to be kept cool to prevent malfunctions and help save on energy costs.
To promote this technology, Supermicro charges the same price as more standard air-cooled systems. Although Dell also has DLC technology, it is just starting to ramp up this technology, so Supermicro has a first mover advantage.
Selling a lot of expensive GPUs will increase revenue, but the company won’t collect big profits on those chips. As such, the company has quite low gross margins, which have come under pressure recently. Last quarter, the gross margin fell to 11.2%, compared to 17.0% a year earlier. By comparison, Nvidia reported a gross margin of 75% in the last quarter, while contract manufacturer Taiwan Semiconductor had a gross margin of 53%.
Can the stock continue to recover?
In addition to pressure on margins, Supermicro’s shares have come under fire following allegations from Hindenburg Research of accounting manipulation, sanctions violations and management self-dealing. A few years ago, the company settled with the SEC for $17.5 million over similar accounting issues, although the company never admitted to the SEC’s allegations.
And to make matters worse, Supermicro has postponed the filing of its annual report following Hindenburg’s brief report. Since then The Wall Street Journal also reported that the DOJ was investigating the company over accounting issues, although neither party has confirmed the existence of an investigation.
As troubling as some developments may be, Supermicro is clearly benefiting from the billions of dollars being poured into building AI infrastructure. It may not have a particularly wide moat, but with major tech companies snapping up GPUs in a massive arms race, it will continue to benefit.
The stock is also not expensive, as it trades at 14 times analysts’ earnings expectations for the 2025 financial year. This is not a stock that you would expect to have a high price-to-earnings ratio, but with the AI growth opportunities on the horizon, it does seem undervalued.
The question, of course, is: what comes next? There are a number of scenarios in which the stock could recover, but Supermicro remains a risky pick due to the uncertainty surrounding its annual report and the potential DOJ investigation. Investors should approach the stock with caution.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Super Micro Computer shares rise on shipping news. Can the stock continue to recover? was originally published by The Motley Fool
