Will Super Micro Computer’s 10-for-1 Split Boost The Stock?

Super Micro Computer stock (NASDAQ: SMCI) has experienced considerable volatility this year, although a potential boost may be on the horizon with the company’s upcoming 10-for-1 stock split.  SMCI stock rose nearly eightfold over the past two years—from about $60 per share in September 2022 to levels of about $460 today, led by strong demand for servers from AI data centers. However, the stock saw a meaningful pullback earlier this year amid concerns over gross margins, supply chain issues, and a delayed 10-K filing following short-seller Hindenburg Research’s accusations of accounting irregularities. Now as the stock prepares for split-adjusted trading starting from October 1, there could be renewed interest in Super Micro shares.

SMCI stock has generated better returns than the broader market in each of the last 3  years. Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. So how will the upcoming split impact SMCI stock?

While splits don’t alter the fundamental outlook for a company, they often trigger a run-up in stock prices post-announcement. We saw this during Nvidia’s recent split and Tesla’s first stock split in 2020. Additionally, stocks tend to outperform post-split for two reasons: they enhance accessibility for smaller investors, driving up demand and trading volumes. In Super Micro’s case, the price of an individual share of stock would fall to a level of about $46 from $460 currently, and this could be a more palatable sum for smaller retail investors. Moreover, splits signal that management is confident about the company’s prospects, indicating that growth may remain strong. There is ample reason for optimism in SMCI stock.  Can Super Micro stock fare better than AI bellwether Nvidia?

SMCI is projected to grow its revenue by close to 90% in FY’25 (the current fiscal year) to levels of about $28 billion, per consensus estimates, as data center-related spending remains strong, with tech companies boosting their AI and accelerated computing capacity. AI models are increasingly multimodal, moving from just text processing to working with speech, images, video, and 3D calling for higher computing power and consequently higher demand for servers and computing capacity.  Although the server market is commoditized, Super Micro does have some competitive advantages, given that its products are seen as being more customizable and more energy efficient than rivals. Super Micro’s customers are also likely to opt for more premium products. For example, the company estimates that costly liquid-cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of server racks it ships next year. The company is also steadily boosting its production capacity. For example, it is getting ready to roll out a new facility in Malaysia that can produce over 5,000 racks of server kits every month.  Although the company has seen its gross margins face some pressure in recent quarters as it sells a higher mix of liquid-cooling systems, which are proving expensive to produce, things could pick up as it eventually builds out a more efficient supply chain for its servers.

Super Micro stock trades at just about 21x trailing earnings and 13.5x forward earnings at the current price level. Is this a reasonable multiple?  We believe it is. While we note that the ongoing compliance-related matters present an overhang over the stock, there is potential for the stock to rise over 2x to $1,000. On the other hand, we present a counter case that outlines how Super Micro stock could decline to levels of about $200 per share.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/25/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates