Companies that decide to split their stock – increasing the number of shares and lowering the price per share – tend to do quite well. Most companies don’t announce a stock split unless their shares have risen significantly over time.
However, there are cases when a stock split occurs during a difficult period for the company’s stock. This is the case for Super microcomputer (NASDAQ: SMCI)whose shares have fallen 35% since the split was announced in early August.
Still, many Wall Street analysts believe there is enormous potential for Supermicro. So, is it time to buy?
Supermicro’s activities are flourishing
As of September 25, a group of 16 analysts had an average one-year price target for Supermicro stock of $729.19. That represents an increase of about 60% from the stock’s closing price on September 25, a day before a Wall Street JournalThis article caused a decrease of 12%.
The optimism makes sense. Super Micro Computer produces components for computer servers. While this space is relatively crowded, Supermicro differentiates itself from the competition by offering highly customizable servers that can scale to any workload type or size. The products are also among the most energy efficient available, saving on running costs in the long term.
With the massive spike in computing demand caused by the artificial intelligence (AI) arms race, Supermicro is benefiting from the same trends that created Nvidia stock through the roof, although Supermicro’s ride was a bit bumpier.
Supermicro isn’t firing on all cylinders at the moment
In conjunction with the announcement of Supermicro’s 10-for-1 stock split on August 6, the company announced its fourth-quarter and full-year fiscal 2024 results for the period ending June 30. While the company achieved strong year-on-year revenue growth of 143% and delivered excellent full-year 2025 guidance of 74% to 101% growth, there were some profitability issues.
As its new liquid cooling product line expands, Supermicro’s gross margin has taken a hit.
This has caused great concern among some investors, as a declining gross margin can also indicate increased competition. However, management believes that gross margin will recover throughout fiscal 2025.
Meanwhile, short-selling firm Hindenburg Research published a report on Supermicro on August 27 alleging accounting manipulation. The SEC has fined Supermicro in the past for accounting issues. At the same time, because Hindenburg is a short seller, it benefits when the stocks it reports on fall, so investors should handle this information carefully. Supermicro responded that the brief report “contains false or inaccurate statements.”
On August 28, Supermicro postponed the filing of its year-end Form 10-K with the SEC, saying it needed more time to “complete its assessment of the design and operating effectiveness of its internal controls over financial reporting.”
Following the delay, Supermicro received a letter of non-compliance from the Nasdaq stock exchange, stating that it is in violation of listing rules for not filing its 10-K on a timely basis. After receiving the letter on September 16, Supermicro has 60 days to comply or risk being delisted.
To complicate matters further, on September 26 The Wall Street Journal reported that unnamed sources had said the Justice Department had launched an investigation into the company. If the reporting is correct, this is only a preliminary investigation and nothing can result from it. However, there may be real problems with the company, which significantly increases the risk of investing in the stock. It will likely be a long time before the public gets full details, so investors will have to be patient with the stock if they choose to buy it.
It’s clear the company is facing serious problems right now, and the stock is down more than 60% from its 52-week high. However, the business case for the components and servers is undeniable.
The current shares are also fairly cheaply valued based on future earnings figures.
If Supermicro can improve its gross margin in the coming year and address concerns about its accounting practices, the stock has a lot of upside potential.
I recently bought the dip because I believe in the company. However, I kept the position size low (about 1% of my total portfolio value). That way, it won’t impact the portfolio too much if stocks continue to plummet, but I could still benefit if Supermicro mounts a recovery like some on Wall Street think is possible in the near term. I was going to buy more, but after the report of a possible DOJ probe, I feel comfortable with the current position size because it represents the high risk and high reward associated with Super Micro Computer stock.
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Keithen Drury holds positions in Super Micro Computer. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Will Stock-Split Super Micro Computer Go to $729 Per Share? was originally published by The Motley Fool