With shares down nearly 40% in the last 30 days alone, Super Micro Computers (NASDAQ: SMCI) rocket-ship rally implodes. Shares are now trading at levels not seen since late January, wiping out nearly seven months of gains in the blink of an eye. The company is reeling from weaker-than-expected profitability. Let’s take a look at what the year ahead has in store.
Super Micro Computer’s disappointing profit
A great company doesn’t always make a good investment because its valuation can price in unrealistic future expectations. This was one of the challenges Supermicro faced in its fourth-quarter earnings report.
Net sales increased by 144% year after year to $5.3 billion, driven by rising demand for the company’s AI infrastructure. However, analysts were disappointed by the adjusted earnings per share (EPS), which came in at $6.25 compared to expectations of $8.07. While Supermicro’s business is booming, profitability is under pressure from lower gross margins, which fell from 17% to 11% year-over-year.
A somewhat shallow economic moat
Supermicro is known for turning the competition between Nvidia (and other chipmakers) on its head graphic processing units (GPUs) in off-the-shelf computer servers. This niche has allowed it to capitalize on the rising demand for AI chips as more data center customers seek to expand their capacity.
However, Supermicro’s “middleman” business model is quite vulnerable. To start with, The company is dependent on the hugely expensive chip supplies from its partners. And it doesn’t differentiate itself well from other server makers like Dell Technologies or Hewlett Packard Enterprise, that are pursuing a similar strategy. This competition could make it harder for Supermicro to pass costs on to consumers or boost its margins by raising prices.
This is a very different situation than Supermicro’s partner Nvidia, which managed to increase its gross margin from 76% to 78.4% in the first fiscal quarter. This is because it has kept customers using its products through popular software solutions such as CUDA (optimized for Nvidia hardware) and a relentless update cycle, which has kept its chips technologically ahead of the competition.
According to management, Supermicro’s weaker than expected gross margins were primarily due to higher supply chain costs and tight inventory key components. They expect this situation to be solved by the end of fiscal year 2025 as manufacturing partners ramp up production, but it highlights the ongoing challenge with the economic canalAnd it could pop up again in the future.
What does the coming year hold for Supermicro?
The next 12 months are shaping be a defining period for Supermicro. Dark clouds are gathering over the U.S. economy as unemployment rises and consumer spending declines starts to stagnate.
JPMorgan analysts predict a 35% probability of a US recession by the end of the year, which could wreak havoc on the AI ​​industry.
Typicalwhen macroeconomic conditions weakenCompanies are tightening their belts by cutting back on speculative and loss-making investments. Consumer AI algorithms would likely fit into this category, as they struggle to generate enough revenue or profit to justify the massive capital expenditures required to run and train them. Supermicro could be particularly vulnerable to a downturn, as its business already faces significant competition and margin pressure.
Is Supermicro stock undervalued?
Immediately future price earnings ratio (P/E) multiple of just 14, Supermicro stock is shockingly cheap. For context, the S&P 500 has an average estimate of 22, while market leader Nvidia boasts 40. It’s hard to understand why a company growing at a triple-digit rate would trade at such a discount, especially if it’s managing to get its gross margins under control.
That said, despite Supermicro’s attractive discount, investors should be cautious about investing in AI-related stocks at this time due to the speculative and unproven nature of the sector and the growing risk of a US recession over the next 12 months.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Where Will Super Micro Computer Stock Be in 1 Year? was originally published by The Motley Fool
