Time To Buy Super Micro Computer Stock?

Super Micro Computer (NASDAQ:SMCI) stock has gained about 10% this year, versus the broader S&P 500, which has declined by about 8% year-to-date. The stock still remains down by almost 70% from all-time highs seen in March 2024. However, there have been a couple of tailwinds for the stock of late, given stronger demand for its AI server systems and partial easing of corporate governance-related concerns seen last year. So, is it time to buy SMCI stock?

Image by Edgar Oliver from Pixabay

Reasonably Strong Fundamental, Poor Cash Flows

• Super Micro Computer has seen its top line grow at an average rate of 74.5% over the last 3 years, led by surging demand for generative AI, which in turn drove server sales.
• The company posted about $1.5 billion in operating income over the last four quarters, with a modest 7.4% operating margin. This is below the S&P 500 average.
• Operating cash flows were -$2.0 billion, representing -9.6% of sales. This was partly due to higher working capital requirements, relating to inventory and receivables.
• The company’s financial position is strong, with $1.9 billion in debt versus a $20 billion market cap, resulting in a low debt-to-equity ratio of 9.6%. Cash and cash equivalents account for $1.4 billion of the $9.7 billion in total assets.

Strong Outlook On AI Server Demand

• Nvidia is slated to ramp up production of its latest flagship Blackwell GPUs. This will scale up demand for SMCI’s servers, which are used to deploy the latest GPUs.
• Revenue guidance for the next fiscal year (ending June 2026) stands at $40 billion, which marks an increase of as much as 70% compared to FY’25.
• SMCI has also been focusing on gaining market share in the direct-liquid-cooled (DLC) server space. DLC is well suited for cooling servers running energy-intensive AI workloads. This is also helping to boost Super Micro’s presence in the AI server space.
• Apart from this, Super Micro has apparently priced its AI servers at a discount compared to its rivals, helping it gain share in the market, although this is impacting gross margins to an extent.

Valuation

• Going by what you pay per dollar of sales or profit, SMCI stock looks relatively good compared to the broader market.
• Super Micro Computer has a price-to-sales (P/S) ratio of 1.0 vs. a figure of 2.8 for the S&P 500
• And it has a price-to-earnings (P/E) ratio of 13.8 vs. the benchmark’s 21.3.
• This is a very fair valuation relative to the company’s recent top line growth.

Risks

• Super Micro’s delays in SEC filings and allegations of accounting irregularities have hurt investor confidence in the past year.
• The company has indicated in its filings that it identified material weaknesses in its internal controls, citing IT issues, lack of documentation for manual journal entries, and insufficient staff segregation.
• There have also been related-party dealings involving the CEO and family. Although these deals may be legal, the extent of family entanglements at Super Micro could create conflicts of interest and signal weak corporate governance.
• The company’s mixed track record of corporate oversight could still hurt long-term shareholder value.

While SMCI stock looks promising, investing in a single stock can be risky. On the other hand, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year 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.

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