It's been a topsy-turvy year for Super Micro Computer (SMCI 10.91%). Once seen as the next big artificial intelligence (AI) stock, it has come crashing down to reality in recent months due to concerns about the reliability of its numbers and accounting controls.
However, after hitting a low of $17.25 on Nov. 15 on concerns that it could get delisted from the Nasdaq exchange, the stock has rallied heavily, and recently traded at about $30. With a new auditor in place and a plan to file its financials (which are late) by February, investors appear to be much more at ease with the stock these days.
But while you might be tempted to buy into the rally, there's still significant risk here, and multiple reasons the stock could be due for a big pullback in 2025.
Is Super Micro's growth rate starting to slow down?
When it comes to AI stocks, the name of the game is growth. Super Micro has experienced significant demand for its servers and storage products as companies race to develop AI models.
Since the company is still transitioning to a new auditor, it hasn't posted a full set of quarterly numbers since August. In November, however, the company did release preliminary results for the first quarter of fiscal 2025 (ended Sept. 30). What was a bit concerning is that Super Micro projects net sales to be within a range of $5.9 billion to $6 billion. That's considerably lower than its previous estimate, which projected sales of between $6 billion and $7 billion. These aren't final numbers, but it looks like a significant miss, and it raises questions about whether the business is seeing a slowdown in demand.
Even if Super Micro does release its financials in a timely fashion, that doesn't mean that the results will necessarily be great or what investors will want to see. While $6 billion in sales would still represent an incredible increase of 183% year over year, the problem is that Super Micro's gross margins still remain incredibly low.
Greater controls and procedures could squeeze Super Micro's thin profit margins
To alleviate concerns around accounting controls and procedures, it seems inevitable that Super Micro may need to hire more staff and spend money on implementing additional protocols to help maintain the accuracy and integrity of its financials.
That additional overhead could mean that Super Micro's profit margins will become even smaller. The smaller those margins are, the less benefit the company gets from any incremental dollar of revenue. In its preliminary numbers for Q1, Super Micro's gross margin was just 13.3%. While that's technically an improvement from the 11.2% it reported a quarter earlier, that's still dreadfully low -- and gross margin comes before accounting for overhead and other indirect expenses. The company's actual profit margin will be even lower.
SMCI Profit Margin (Quarterly) data by YCharts.
This will be the key metric that investors will want to focus on when Super Micro finally reports its full quarterly results -- what its profit margin looks like after factoring in all the changes it has made. If it deteriorates significantly, that could quickly cripple the stock. The seemingly cheap 9 times forward earnings that it trades at today could be due for an adjustment, as analysts will likely update their future earnings expectations for the stock.
Super Micro's stock is a gamble right now
There are so many unknowns surrounding Super Micro today that it can be next to impossible to predict how it might perform in 2025. If it releases its annual report and quarterly filings as planned, and its numbers still look great, then it could certainly take off. But if it doesn't, or if it releases the numbers but its growth rate or its bottom line don't look as good anymore, any one of those reasons could trigger a sell-off. Of course, if it fails to report its financials by the Nasdaq's latest deadline, that too could quickly send the stock spiraling.
Super Micro is one of the more volatile stocks on the market right now. Unless you have a high risk tolerance, you may want to just take a wait-and-see approach with it for now.
