Along with the chipmaker Nvidia, Super Micro Computer (SMCI 10.91%) has been one of the biggest beneficiaries of the generative artificial intelligence boom, helping turn AI chips into user-ready servers. However, after rising by over 2,200% over the last five years, the company's share price growth has begun to stall. Let's dig deeper to determine if it's time to buy the dip or run for the hills.
Second-quarter earnings exposed problems
Super Micro's shares have fallen around 26% since it reported fourth-quarter earnings on Aug. 6. And this might be surprising, considering the numbers don't actually look that bad compared to the typical company. The ever-rising demand for AI hardware sent revenue up 144% year over year to $5.3 billion, while net income jumped 82% to $353 million.
With that said, Super Micro's gross margin (which measures the selling price of its products relative to their direct production costs) indicates a worrying trend -- it fell to 11.2% compared to 17% this time last year.
Management blames this problem on high supply chain costs and a tight inventory of key components, which they believe they can resolve by scaling production by the end of 2025. And new servers based on next-generation Nvidia AI chips (using the Blackwell architecture) could help power near-term growth over the next few quarters.
That said, the tightening margins mean Super Micro has failed to pass on rising production costs to consumers, suggesting a weak economic moat. The company faces competition in the server market from rivals like Dell and HP Enterprise, which could pressure its market share as it seeks to balance its selling prices with its production costs to maximize profits.
Short-sellers spread uncertainty
As if Super Micro's operating challenges were not enough, the company also faces the problem of unwanted media scrutiny. On April 27, famous short-selling organization Hindenburg Research released a report accusing the server maker of accounting manipulation, self-dealing, and sanctions evasion related to potential exports to Russia.
While serious, these allegations should be taken with a grain of salt because of the short-seller's conflict of interest (they make money if shares go down). And Super Micro is yet to respond.
Image source: Getty Images.
That said, the Hindenburg report also circles back to the issue of Super Micro's gross margins, which are shaping up to be a big pressure point for investors.
They highlight rising competition from companies like Foxconn, which recently announced plans for significant growth in its AI server business. Hindenburg also claims Taiwanese original design manufacturers (ODMs) can operate in the AI server industry with significantly lower prices than Super Micro and could eventually take away its market share.
Super Micro's decision to delay filing its full-year financial report a day after Hindenburg's scathing report does little to soothe market fears that something might be wrong with its accounting practices. The company has a history of similar problems, and in 2020 it was fined $17.5 million by the SEC for accounting violations and improperly reported revenue.
The stock is dirt cheap
Super Micro's valuation is shockingly low compared to its triple-digit growth rate. With a forward price-to-earnings (P/E) multiple of just 13, shares are significantly cheaper than the S&P 500 index's average estimate of 23. And despite the company's recent challenges with gross margins, it is hard to make sense of this rock-bottom valuation based on Super Micro's operating performance alone.
The company isn't valued where one would expect for a tech company in a red-hot industry like generative AI. And the market might be pricing in the possibility that some of Hindenburg's allegations are true. Investors should avoid Super Micro stock until more information becomes available.
