Shares of Super Micro Computer (SMCI) took a significant hit on Aug. 7, closing over 20% lower. This drop in Super Micro stock followed the company’s lower-than-expected earnings for its fourth quarter (Q4) of fiscal 2024.
SMCI stock is now down approximately 60% from its 52-week high of $1,229, reflecting a broader sell-off in tech stocks amid challenging macroeconomic conditions and growing competition, which could impact its margins.
The company reported an impressive 143% year-over-year increase in the top line in Q4. Moreover, its revenue of $5.31 billion came in slightly ahead of analysts’ expectations for $5.30 billion. SMCI's adjusted earnings per share (EPS) grew about 78% from the prior year. However, it fell short of Wall Street’s estimate of $8.07 per share by a significant margin.
The primary area of concern was Super Micro’s gross margin, which declined to 11.2% from 17% in the same quarter last year and 15.5% in the previous quarter. This considerable drop reflects a higher mix of lower-margin hyperscale data center business and expedited costs for its Direct Liquid Cooling (DLC) components.
Adding to these challenges, management indicated that shipments could continue to face short-term constraints due to supply chain bottlenecks affecting key components for its advanced platforms. This situation could further pressure margins. Additionally, the delayed shipment of Nvidia's (NVDA) Blackwell systems, which require high-margin liquid-cooled racks — an important demand driver for Super Micro's DLC solutions — could pose additional short-term hurdles.
Despite these headwinds, Super Micro's issues appear to be temporary. Plus, the sharp decline in the stock price presents a unique buying opportunity for a company well-positioned to benefit from solid AI-driven opportunities.
Given this backdrop, let’s delve into the factors that make Super Micro stock an attractive investment at its current market price.
Super Micro: Positioned for Strong Growth
Super Micro is a leading provider of high-performance server and storage systems, catering to the rapidly growing artificial intelligence (AI) and cloud storage markets. It is witnessing solid demand for its products, primarily fueled by its leadership in AI infrastructure technology, particularly in Generative AI training and inferencing.
The momentum in Super Micro's business will likely sustain in fiscal 2025, as it is witnessing strong demand for its next-generation air-cooled and DLC rack-scale AI GPU platforms. Notably, acceleration in its innovative DLC products, a significant design win pipeline, and a strong backlog position Super Micro well for continued growth in fiscal 2025.
The company is powering some of the largest AI factories. Further, as more data centers adopt its latest DLC solutions, which offer significant improvements in cost and performance compared to traditional air-cooled systems, the company is poised for solid growth. Super Micro aims to capture 25% to 30% of new global data center deployments with its DLC solutions over the next 12 months, which could significantly boost its revenue and profitability.
Super Micro is expanding its solutions to address power shortages and cooling inefficiencies in data centers. The company’s upcoming data center Building Block Solutions (BBS) will cut data center build time by offering optimized and cost-effective solutions. The new offerings are expected to generate solid demand and boost overall sales.
Thanks to record-high backlogs, a suite of winning products, and a growing customer base, Super Micro expects Q1 revenue to be between $6 billion and $7 billion, higher than Wall Street’s forecast of $5.46 billion. For fiscal 2025, the company anticipates revenue between $26 billion and $30 billion, compared to $14.94 billion in fiscal 2024, indicating sustained business momentum.
Margin Headwinds to Subside
Super Micro’s margins came under pressure in Q4. While supply-chain headwinds could pose challenges in the short term, its gross and operating margins are expected to improve gradually. The company’s leadership forecasts gross margins to return to the target range of 14-17%, driven by improved product and customer mix, manufacturing efficiencies for new DLC AI GPU clusters, and new platform introductions.
Additionally, Super Micro’s long-term gross margins will benefit from lower manufacturing costs as it scales up production in Malaysia and Taiwan, and expands in the Americas and Europe.
Bottom Line on Super Micro Stock
While Super Micro faces short-term margin headwinds, its strong market position and growth potential in the AI and cloud storage sectors make it a compelling investment. Additionally, the delay in Nvidia’s Blackwell system will not have any major impact on Super Micro’s financials, as its liquid cooling solutions for the H100 and H200 platforms offer significant growth opportunities. Consequently, the recent decline in SMCI's stock price presents a favorable entry point for investors aiming to capitalize on the company's solid long-term prospects.
Given the near-term margin headwind, some analysts remain cautious about Super Micro stock. However, higher sales and gradual margin improvement could lead to a positive shift in sentiment. Out of 13 analysts in coverage, seven rate SMCI as a “strong buy,” five recommend a “hold,” and one has a “strong sell,” resulting in a consensus rating of “moderate buy.”
The average price target for SMCI stock is $1,010.91, suggesting a potential upside of approximately 105% from its current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
