After a fantastic start to the year, Supermicrocomputer‘s (NASDAQ: SMCI) The company’s stock chart has undergone a dramatic change over the past six months. It has lost nearly 60% of its value since its peak and recent events appear to have further damaged investor confidence in the company.
First, the fourth-quarter fiscal year 2024 results released on August 6 fell short of Wall Street expectations, and management’s guidance was disappointing. Second, short-seller Hindenburg Research published a report alleging accounting irregularities at Supermicro. Then, Supermicro’s management announced that it was delaying the filing of its annual report, which only increased the negative press.
These factors explain why Wall Street analysts have been downgrading the stock lately. But with the server and storage systems maker’s stock now trading at an attractive 22 times trailing earnings and 13 times forward earnings, opportunistic investors may be tempted to buy Supermicro. Should they do so in light of recent developments?
Addressing the elephant in the room
Investors should keep in mind that Hindenburg is a short seller and has a financial interest in Supermicro’s share price falling. Against that backdrop, we cannot be sure that the allegations Hindenburg is making are valid, especially given that the short seller has been wrong in the past. That said, Supermicro was charged by the Securities and Exchange Commission (SEC) with accounting violations in August 2020, when it was found to have prematurely recognized revenue and understated its expenses over a three-year period.
However, the company has rebounded remarkably since then, posting outstanding gains over the past two years thanks to the emergence of a new catalyst in the form of artificial intelligence (AI). Its revenue in fiscal 2024 more than doubled to $14.9 billion, up from $7.1 billion the year before. Non-GAAP earnings soared to $22.09 per share, up from $11.81 per share in fiscal 2023.
Regarding the delay in Supermicro’s annual results, management clarified that “we do not anticipate any material change to our fourth quarter or fiscal 2024 financial results.” It added that the company expects a “historic” 2025 with “a record number of orders, a strong and growing pipeline of awarded projects, and market leadership positions in a number of areas.”
Supermicro says the recent events will not impact its production capacity and that it is on track to meet demand for its AI server solutions. It is worth noting that Supermicro expects its revenue in fiscal year 2025 to be between $26 billion and $30 billion. That would be another year of notable growth from $14.9 billion in fiscal year 2024.
Although it faces margin challenges due to increased investments it is making as it ramps up capacity to meet strong demand for its liquid-cooled server solutions, management is confident that it will return to its normal margin range before the end of the fiscal year. Analyst consensus estimates also indicate that Supermicro’s earnings are on track to grow at an incredible pace in the current fiscal year, followed by significant jumps in the next two years as well.
What should investors do?
The delay in Supermicro’s annual presentation caused JPMorgan downgrade the stock from overweight to neutral and cut its price target from $950 to $500. Even Barclays JPMorgan downgraded the stock from overweight to equal weight, citing margin pressure facing Supermicro as well as delayed reporting. However, JPMorgan’s downgrade was not a result of the Hindenburg report or a reflection of its ability to comply with regulations, but rather due to the near-term uncertainty surrounding the company and the lack of a compelling case to buy the stock.
Risk-averse investors should therefore wait for more clarity before buying shares of this AI company. However, those with a higher risk appetite who want to add a fast-growing company to their portfolios may want to consider buying Supermicro now. It looks capable of maintaining its impressive growth over the long term thanks to the huge opportunities available to it in the AI server market.
Analysts expect Supermicro’s earnings to grow at an annualized rate of 62% over the next five years. If the company can overcome its current problems, it could prove to be a solid investment considering the valuation at which it is currently trading.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
Is Super Micro Computer Stock a Good Buy Now? was originally published by The Motley Fool