Super Micro Computer (SMCI) stock has been on a tear, surging over 33% in just the past two trading days following a notable analyst upgrade and news of a $20 billion partnership with Saudi data center firm DataVolt. However, despite the recent euphoria, there’s one critical issue that might take investors by surprise. Super Micro’s margins are very low, and they’ve actually been on the decline. Separately, what’s driving Super Micro stock’s surge?
Single-Digit Gross Margins
As of Q3 FY’25, the most recently reported quarter, Super Micro’s gross margin, which is the percentage of revenue left after reducing the direct costs of producing goods, stood at just 9.6%, down from 11.8% in Q2 FY’25 and 15.5% in Q3 FY’24. What about net margins? Under 3% for the last quarter. That’s far below industry peers. For context, HP Enterprise, another major server vendor, posted gross margins of around 29% and net margins of about 9%. AI chip behemoth Nvidia’s gross margins were a staggering 75%, with net margins above 50%. The weaker margin profile has hit Super Micro’s earnings pretty hard. Diluted EPS declined to $0.17 in Q3 FY’25, down from $0.51 in the previous quarter and $0.66 a year ago. See: Buy or Sell SMCI Stock?
Why Are Margins So Weak?
This margin compression is especially concerning given the company’s robust top-line growth. Revenue rose 19.4% year-over-year last quarter, and analysts project over 45% growth this fiscal year and another 35% next year. But if margins stay this low or fall further, that revenue growth won’t translate into meaningful earnings gains. If margins remain this way, instead of driving earnings, Super Micro could end up scaling a low-margin business that becomes harder to manage without creating real value for shareholders.
Now, liquid cooling technology has been pretty hard to implement at scale. Concerns over reliability, including issues such as leaks and condensation, have made it tricky. But SuperMicro appears to have been able to crack this technical challenge, deploying these systems at a relatively large scale. Considering this, the higher upfront costs and margin pressure might just end up being a decent long-term trade-off, as it might give the company an edge in the AI hardware market.
Investors must be a bit cautious with investing in SMCI stock. Super Micro has faced significant controversy over the past year, including allegations of accounting irregularities, delays in SEC filings, and scrutiny from short-sellers. Although some of these issues have eased in the last few months, following the company’s recent filing of its financial statements, the mixed earnings and declining margins, coupled with a spotty track record of corporate governance, suggest that investors may need to proceed with caution with SMCI stock.
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