Super microcomputer (NASDAQ:SMCI) This month, shares split and are now trading at a tenth of what they were before the split. For investors, that means a lower share price, and perhaps the opportunity to own more entire shares. Stock splits can sometimes have positive effects on the stock price, even if they don’t fundamentally change a company’s prospects or improve its earnings.
With shares of Super Micro Computer, also known as Supermicro, down more than 50% in the past six months, could the recent split boost the stock and possibly help stop the downward spiral?
Why a stock split might not help Supermicro
A stock split does not solve any problem for a company. Regardless of whether Supermicro shares trade at $450 or $45, investors can purchase fractional shares if they want to invest in them but don’t have the cash needed to acquire full shares of the company. And that’s why stocks are normally split shouldn’t lead to a stock price rally; they don’t change the valuation multiples to make the stock a better buy.
Some investors may think that a stock is cheaper and better to buy because it is priced lower, but that is a mistake. When it comes to valuation, you should always look at earnings per share and revenue multiples, taking into account the share price. And stock splits don’t change those multiples.
Stock splits can become a positive catalyst if a stock increases significantly in value and a company subsequently opts for a split. In the case of Supermicro, however, the stock has been crashing lately, and the stock split comes at a time when there is a lot of negativity and bearishness surrounding the company. Therefore, a split may not have a positive effect on the share price.
Supermicro’s problems have nothing to do with its stock price
For Supermicro, there are much bigger concerns for investors than the share price being too high. The company’s margins are under pressure and the Department of Justice (DOJ) is reportedly investigating the company after a brief report in August alleged that the company was involved in questionable accounting practices. Management has denied any wrongdoing and the DOJ investigation may not necessarily lead to anything substantial and consequential for the company and its investors.
The bigger problem, however, is that the company’s profits may not grow at a high pace if Supermicro’s margins don’t improve. In its most recent earnings report, for the quarter ended June 30, the company’s gross margin was just 11%, compared to an already fairly low rate of 17% a year ago. Low margins could offset much of the benefit the tech company will get from generating strong server sales and expanding its business, and that’s the biggest reason I’m concerned about the stock right now.
Are Supermicro Shares a Buy?
I don’t believe a stock split will save Supermicro stock, and I don’t think the DOJ probe will cripple it either. Short reports are often biased and worthless, and while they may temporarily send a stock lower, they rarely reveal disastrous findings that auditors, analysts and investors have all missed.
The company can allay many concerns by simply posting strong earnings numbers and showing that it can grow both top and bottom line at high rates. But it still has to prove it can do that.
Unless you’re comfortable with the risk associated with owning Supermicro stock today, the safest option is to take a wait-and-see approach for now. The biggest question mark with the company remains its ability to grow its profits, because if it can’t, it will be difficult to justify buying the AI stock.
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David Jagielski has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Will Super Micro Computer’s stock split help its stock rise? was originally published by The Motley Fool
