Supermicro Stock Analysis: The AI Revolution's Underdog Shovel or a Risky Bet?
I wasn’t particularly knowledgeable about the semiconductor space a year ago. All I knew was that an Nvidia RTX 3050TI was a good fit for my $600 desktop build back in 2017.
Missed the recent SMCI 0.00%↑ run up in the early March before the dip too? You wouldn’t want to miss this article where you might just found yourself a potential 10-bagger shovel.
Jokes aside, in this article, I’ll break down SMCI by covering:
But first, let me explain how I got interested in SMCI —because as a reader, you deserve to know the author’s backstory behind this stock analysis.
A little backstory, knowing about SMCI
By chance or luck, I was clueless about the semiconductor space until I met a friend whose parent has decades of experience in the industry. It all started because I introduced my friend to investing with a $100 broker account, and the rest was history.
My friend gave me a quick rundown on the semiconductor industry, which piqued my interest. I was already fascinated by AI and its future potential, but I didn’t know how SMCI could play a pivotal role in Nvidia’s future roadmap.
The reliability of the information? I can’t be sure. But when someone’s parent has decades of experience, you bet I listen.
Overview of Supermicro Computer Inc.
Key Points
Huge Market Share: Supermicro is a leading player in AI server technology, especially known for its complete liquid-cooled systems and Rack Scale Plug-and-Play AI SuperClusters designed for high-performance AI and HPC workloads.
Years Ahead of Peers: They have a first-mover advantage in liquid cooling technology, developing direct liquid cooling (DLC) solutions in the mid-2010s—long before air-cooling systems became less effective for high-density computing.
Strategic Partnerships with Leading Tech Companies: Collaborations with tech giants like NVIDIA, Intel, and AMD give them early access to advanced AI and GPU technologies, boosting their high-density AI compute power. They’re also on Intel’s prestigious Titanium partner tier.
Cost-Efficiency and Rapid Deployment: Their turnkey rack-scale solutions allow for quick AI infrastructure setup, enabling businesses to be operational within days and what’s more, it can reduce ongoing data center power usage by up to 40%!
Specialized Focus on AI and HPC: In terms of profitability and scale, Supermicro is better positioned on AI and HPC allows for faster innovation compared to broader IT providers like Dell and HPE.
Today, Nvidia is leading the AI revolution, and Supermicro (SMCI), as one of the top companies in high-performance computing, enterprise servers, storage solutions, and cloud computing, has seized this opportunity, benefiting immensely from its Nvidia partnership.
What sets SMCI apart is its customizable approach to server building, distinguishing it from competitors. The company excels at:
Plug-and-play rack-scale solutions: Quick at assembling and manufacturing servers that seamlessly integrate with Nvidia’s latest chips.
Pursuing sustainability initiatives, such as developing fully green Direct Liquid Cooling (DLC) servers—a bold move in an industry often criticized for its environmental impact.
But can this ambition become reality, or is it just hype riding the AI wave? This question isn’t idle; it requires looking back at historical innovation and its impact today.
Evolution, Breakthroughs & Their Relevance to Supermicro.
Humans constantly evolve, seeking breakthroughs and solutions. Supermicro is addressing the limitations of traditional air cooling in servers, data centers, and AI hardware, which can undermine the potential of powerful chips like Nvidia's.
In the tech world, risks and rewards are intertwined. While the unknown carries risks, it also presents opportunities. Supermicro is at the forefront of this shift. Understanding chip advancements is crucial:
Early chips had limited processing power. (Reason why the early stage of AI plateau multiple times before the next breakthrough)
Gordon Moore’s observation that transistor counts double roughly every two years (Moore’s Law) has driven exponential growth in computing power. The acceleration enabled by Moore’s Law has made AI more accessible and affordable.
This historical context sparks the journey of Supermicro, which dates back to 1993. Charles Liang had a vision of building high-performance computing systems by focusing on innovation, customization, sustainability, and customer satisfaction. It just so happens that this vision align with the AI boom today.
It’s safe to say the AI trend might not be dying anytime soon. But rather at an inflection point. As long as Moore’s Law holds, AI tech will evolve, opening new possibilities.
As we delve deeper into SMCI’s narrative, it’s essential to uncover the business fundamental and factors behind its stock price movement over the past year. Many factors need to be examined.
Disclaimer: The information provided above should not be considered financial advice. This content is for informational purposes only and does not constitute a recommendation to buy or sell any securities. Readers are encouraged to conduct their own research and due diligence before making any investment decisions.
Supermicro: IPO and Stock Performance
SMCI went public in 2007, raising $64 million by selling 8 million shares at $8 each. As of October 8, 2024, SMCI trades at $49, factoring in a 10-1 stock split, achieving a staggering 5,204% return over 17 years—an impressive 212% CAGR!
If you’re tracking the 52-week low, remember that we’re not far from the recent bottom of $38.65. With any “bad news,” we may revisit those levels—or lower. The stock market’s rationale is impossible to predict, especially they are down when they missed 10-K report and similarly they are up, when they shipped 100,000 GPUs with its liquid cooling technology.
Talk about the rationality of stock market. You can’t.
Despite AI hype and its revolutionary liquid-cooling servers, SMCI’s mission remains clear:
“We aim to help people enjoy new technology, smarter technology like AI, without harming our planet. That solution is Green Computing.”
— Charles Liang, Supermicro CEO
Supermicro’s Financial
Here we will take a look at their key financial metric that is affecting SMCI at play.
Top-Line Growth (Sales & Revenue)
Over the past decade, SMCI’s revenue growth has been relatively flat until the recent two years when it quadrupled to US$14.9b TTM FY2024, the spike in revenue aligns with the rise of AI technology and tools like ChatGPT. Which brings along a huge surge in AI hardware demand and partnerships with Nvidia, Intel, and AMD.
Despite so, they are still running on a thin profit margin, as their cost of sales still largely dominate their gross profit by 6x!1
While AI hardware is a major driver, SMCI isn’t just about AI; they offer diverse IT solutions tailored to business needs—long before the AI hype. What sets SMCI apart is their customizability approach—they build solutions based on requirements rather than offering a “fixed product catalogue.” This flexibility makes them a preferred option over larger competitors like HP and Dell.
However, this strategy comes with its own challenges.
Inventory Issues
SMCI’s broad product coverage leads to inventory management challenges. The company needs to manage stock levels efficiently to avoid potential risks with key partners. If they lose a major partner, the impact could be significant, given their reliance on these collaborations.
On the upside, SMCI’s rapid innovation keeps their products relevant, preventing them from becoming outdated. This agility and adaptability are strengths that help them stay competitive in a fast-paced tech landscape. Their ability to innovate quickly suggests that SMCI is in the early stages of a strategic growth turnaround. Investors, focused on future projections, have shown speculative interest, driving the stock to an all-time high of $1,229 before recent declines, which were amplified by short-selling following the Hindenburg Research allegations.
Current Financials: A Mixed Bag?
Despite the impressive top-line growth, concerns about bottom-line performance remain. Is this a red flag?
It’s important to scrutinize their assets. I don’t fully count their inventory as a valuable asset because if goods aren’t sold, inventory becomes worthless.
Let me explain:
If a fresh-pressed lemon juice costs $1.50, but no one buys it, the juice is worthless compared to the $0.50 lemon used to make it.
According to the latest 24Q32 breakdown, 12% (US$499 million) of SMCI's inventory consists of raw materials and purchased parts, while the remaining 88% (US$3.6 billion) is composed of work-in-process and finished products.
I consider only the 12% as a reliable asset, as it poses less liquidity risk compared to the other 88%, which depends heavily on partnerships. If these parts can't be utilized, they could become worthless.
On top of that, SMCI’s has a weak cash position of approx. US$1.66b that may not support their short-term debt of US$1.5b, and that’s on top of not considering the fact they are burning cash as a business in the short-term.
Rising Operating Expenses: A Necessary Cost?
Operating expenses have been increasing, which is expected for a company undergoing a turnaround. SMCI’s strategic partnerships and innovation showcase the strength of their products, prioritizing growth over short-term profitability—a typical Business 101 approach for companies aiming to scale.
Their cash flow seems justifiable (at the very least— short-term), as SMCI positions itself as a first-mover in the AI hardware and server space. This strategic stance supports their long-term growth prospects, alleviating concerns about immediate profitability.
When examining the Earnings-Per-Share (EPS), the drop has been minimal, primarily due to lower gross margins and increased in operating expenses, such as R&D, sales and marketing. These investments are crucial for ongoing innovation.
Looking Ahead
Despite recent challenges, SMCI’s leadership remains confident. CEO Charles Liang projects net sales of $30 billion by the end of fiscal year 2025, attributing this growth to the rising demand for AI and high-performance computing (HPC) solutions.
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Supermicro’s Recent and Past Controversial
What drives SMCI’s stock price movements beyond financial performance and earnings reports? Often, it's news events. Below are some recurring issues that have historically impacted the company's valuation:
ChineseTaiwanese-Based Founder and Geopolitical ConcernsAccounting Manipulation & Allegations of Fraud
Market Sentiment & Profit-Taking
1. Chinese Taiwanese-Based Founder and Geopolitical Concerns
Despite being founded by Taiwanese-born Charles Liang, Supermicro is often misidentified as China-based company. Given the geopolitical tension between China and Taiwan, this perception still persists… despite the actual distinctions. It seems like any Chinese origin is automatically linked to China—(*cough*) made me think of Singapore TikTok CEO, Shou Chew, getting questioned about his nationality constantly.
Ok, now we know this joke goes a long way… Back to the topic!
The infamous allegations of hardware compromise from years ago—accusations that “Chinese spies” were embedding microchips to steal data—still cast a shadow. Even though Amazon and Apple dismissed these claims as false, the risk lingers. Any day you could wake up and find the stock down 40% due to this recurring fear. It’s a risk that remains in the background, ready to resurface.
2. Accounting Manipulation & Frauds (Allegations & more allegations)
Supermicro (SMCI) has recently faced scrutiny over its financial reporting, with delays in filing key documents like the 10-K causing some concern. However, these delays are not a common issue in the company’s history. While there was an investigation into their accounting practices back in 2018, SMCI has since returned to compliance, working with regulators and fulfilling its reporting duties.
Plus, if the 10-K numbers look off, they can be cross-verified with all four quarters of 10-Q 2024.
Despite this, Hindenburg Research recently published a report alleging accounting manipulation, sibling self-dealing, and sanctions evasion. They suggest that SMCI might be using aggressive accounting tactics3, like recognizing revenue before delivering products, which raises questions about the accuracy of their financials. The report details 45 points, including claims of sibling self-dealing and the rehiring of a CFO previously charged with accounting violations and many other allegations.
The key here is to distinguish between aggressive accounting strategies and outright fraud. Yes, SMCI has faced scrutiny, but it’s still fulfilling its financial reporting duties, even if some adjustments have been made down the line. For investors, the question is: Does this align with your expectations for transparency? At the end of the day, the onus is on investors to assess whether these practices match up with their own comfort level when it comes to financial integrity.
Personal Thoughts
After reading the short-seller thesis, one could easily be swayed by its crisp precision(at being al-right). But you know what else is perfectly executed? A serial killer’s act (they wouldn’t be called that otherwise). And we know how those stories usually end—they don’t last forever. The same applies to the stock market: the truth always emerges.
3. Market Sentiment & Profit-Taking
Even without new controversies, market sentiment plays a significant role. With all the AI hypes, you wouldn’t be surprise one day it shoots up 100% and the other day it could fall like the share price is being manipulated and it requires “lawsuit to protect the investors”. Just know, the pool of serious buyers are significant less, but more of the get rich quick scheme individual are part of the game. You may never end up with a good price, but at least, you have to know the game and the future of SMCI, otherwise none of this would make sense to you, at least from an investor perspective.
The Bottom Line: If the short-seller report’s allegations worry you, it might be wise to steer clear of this stock. However, if you're comfortable with the risks and believe in SMCI’s long-term vision, continue reading to explore its valuation metrics.
If you are still here—looks like you're not spooked— Congrats on coming this far. Do smash the like button and subscribe! As it helps to provide more useful content for other readers!
Let’s dive into the final section on Valuations.
Valuations of Supermicro Computer Inc.
Evaluating the valuation of Supermicro Computer is no easy task. As a company currently undergoing a turnaround and in the early stages of growth, the range of possibilities is vast, making it challenging to pin down an accurate valuation (in terms of value… I meant).
SMCI Financial Reviews
When it comes to valuing Supermicro, let's be honest—it's not exactly a walk in the park. The numbers can be “not-so-stable and not-so-friendly,” which makes forming a reliable valuation somewhat tricky. But don’t worry; these figures still offer a glimpse into the potential explosive growth on the horizon for SMCI.
In looking back at Supermicro’s financials, the company certainly meets expectations as a turnaround growth candidate, particularly when we zoom in on three crucial metrics
Price-to-Book (P/B) Value
Earnings Per Share (EPS)
Price-to-Earnings (P/E) Ratio
Using a bit of an eyeball technique, we can see that these metrics align with earlier insights. The impressive revenue growth paired with a consistent rise in the P/B ratio signals that the company is rapidly expanding—this is a critical indicator of a turnaround expansion4.
Next up, let's talk about EPS. With SMCI’s current P/E ratio sitting at around 23.71, this could mark the stock as a promising buy, especially when considering its growth trajectory over the coming years. But hold your horses; we must also acknowledge the risks tied to these fundamentals. The spreadsheet tells a somewhat different story, indicating limited value in the stock when it comes to pricing.
Finally, the company’s growth over the past two years hints at a compound annual growth rate (CAGR) in the high double digits—if the narrative continues to unfold favorably, that is.
To put it all together, while the financial metrics show promise, they come with caveats. Supermicro’s ascent is noteworthy, but it's essential to approach with a mix of optimism and caution. If the company can navigate its current challenges and capitalize on the growing demand for AI technologies, we could witness a remarkable transformation.
Food for thought: Will Supermicro chart a course to become a trailblazer in the AI revolution, or will they find their boat capsized, devoured by the relentless sharks of the tech industry? What do you think?
Conclusion
SMCI has never seen such growth for 15 years since its IPO, it is more compelling for anyone to say that they were preparing for this day to come, while their competitor are solving today’s problem, they were preparing for the future since the 2000s.
The technology they have implemented in the past has seen not much of use-case due to the lack of needing such a robust, but with the rise of ChatGPT and AI, the market trend seems to drastically shifted, as the mover advantage starts to kick in for SMCI, their product became highly relevant and demand. This is what termed as a trend-shift in the industry, but how sustainable it is, is inevitably in the unknown, nobody knows exactly for sure— especially in a fast moving industry like AI, it’s likely anybody would raise doubt that the trend will continue before it backfires.
That said, Charles Liang as a founder and CEO of the company, has a view point on optimistic growth for the company, how likely will the trend be.
Takeaway
Here are some key takeaways I feel compelled to write as a note to self and to the reader.
Supermicro as the "Shovel" in the AI Gold Rush: Nvidia, Intel, and AMD are the miners, and Supermicro is their shovel. It’s well-positioned to benefit from AI advancements, but if the AI hype wanes, so might SMCI’s growth.
Not for Traditional Value Investors: SMCI’s thin margins and fluctuating cash position indicate volatility. It’s more suited for growth investors willing to ride the AI trend, with potential high rewards down the line.
Aggressive Accounting vs. Fraud: SMCI’s accounting practices are aggressive but compliant. They present higher risk but could offer higher rewards. It’s a choice of investor comfort.
Inventory and Earnings Alignment: Rising inventory matches revenue growth, hinting at strong product demand. However, monitoring inventory management and partnerships remains essential.
Geopolitical Risks: With Taiwanese roots and past controversies, geopolitical issues could affect SMCI. Investors wary of these risks may want to stay cautious, but there’s potential for significant gains for those willing to take the chance.
Investing in Supermicro isn’t just about the numbers; it’s about recognizing the company’s position in the AI gold rush. If you believe in the future of AI and Supermicro’s role, this could be a high-risk, high-reward opportunity waiting to unfold.
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Disclaimer: The information provided above is not intended as financial advice. The author may hold, or may have held, a position in the mentioned security at the time of this report’s publication. This report does not constitute investment advice, and readers are encouraged to perform their own research and due diligence before making any investment decisions.
At the time of writing, their gross profit is US$2.11b and cost of sales is US$12.83b.
24Q4 did not show a breakdown of SMCI’s inventory so we can only make assumption from 24Q3.
In reality, there is no right or wrong — in deploying aggressive accounting tactic, it’s just business preference, yet notice how the words are being played, being aggressive in accounting tactics ≠ fraud, fraud is outright manipulating with the literal numbers into the company’s interest only.
Given the numbers in revenues and EPS are increasing, SMCI’s inventories expansion is justified.