Super Micro Computer stock has risen roughly 10% so far this year, compared to the broader S&P 500, which has dropped about 8% year-to-date. Despite this gain, the stock is still down nearly 70% from its all-time highs reached in March 2024. Recently, a few positive developments—such as growing demand for its AI server systems and some resolution of corporate governance concerns from last year—have helped lift sentiment. So, is now the right time to consider buying SMCI stock?
Reasonably Strong Fundamentals, Weak Cash Flows
- Super Micro Computer’s revenue has grown at an average annual rate of 74.5% over the past three years, fueled by rising demand for generative AI, which has driven server sales.
- Over the past four quarters, the company reported operating income of about $1.5 billion, translating to a 7.4% operating margin—below the S&P 500 average.
- Operating cash flows stood at -$2.0 billion, or -9.6% of revenue, due in part to elevated working capital needs, particularly in inventory and receivables.
- The company’s balance sheet is healthy, with $1.9 billion in debt and a market capitalization of $20 billion, resulting in a low debt-to-equity ratio of 9.6%. It holds $1.4 billion in cash and equivalents out of $9.7 billion in total assets.
Strong AI Server Demand Outlook
- Nvidia is expected to increase production of its new Blackwell GPUs, which is likely to boost demand for SMCI’s servers that support these advanced chips.
- The company has issued revenue guidance of $40 billion for the fiscal year ending June 2026, marking a potential 70% increase over FY’25.
- SMCI is actively targeting market share gains in the direct-liquid-cooled (DLC) server segment, which is ideal for managing the heat from AI-heavy workloads, strengthening its position in the AI server space.
- Additionally, Super Micro appears to be underpricing its AI servers compared to competitors, allowing it to gain market share, though this is exerting pressure on gross margins.
Valuation
- Based on sales and earnings multiples, SMCI stock appears attractively valued relative to the broader market.
- Its price-to-sales (P/S) ratio is 1.0, compared to 2.8 for the S&P 500.
- The company also trades at a price-to-earnings (P/E) ratio of 13.8, versus 21.3 for the benchmark index.
- This valuation seems reasonable given the company’s recent strong revenue growth.
Risks
- Super Micro has previously experienced delays in SEC filings and faced allegations of accounting irregularities, which have eroded investor confidence.
- The company disclosed material weaknesses in its internal controls, including IT system issues, insufficient documentation of manual journal entries, and limited segregation of duties.
- There have also been related-party transactions involving the CEO and family members. While potentially legal, such arrangements raise concerns about governance and possible conflicts of interest.
- These governance challenges may continue to affect long-term shareholder trust and value.
Although SMCI stock shows potential, investing in a single company carries risks. In contrast, the Trefis High Quality Portfolio, composed of 30 stocks, has consistently outperformed the S&P 500 over the past four years. Why? Because these stocks have delivered superior returns with lower volatility compared to the broader index, as demonstrated in the HQ Portfolio performance metrics.
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