Is Super Micro Computer stock a good buy right now?

Excitement around artificial intelligence (AI) has played a significant role in driving markets higher so far this year. While big tech stocks such as Nvidia And Microsoft have seen outsized buying activity, many investors have turned to less obvious choices in hopes of identifying the next big AI opportunity.

One such company that has seen its share of hype is Super microcomputer (NASDAQ: SMCI)Shares of the AI ​​darling are up 234% over the past year and 218% in 2024 alone.

While Supermicro is closely affiliated with Nvidia, the underlying business is actually quite different – and in my opinion, much less lucrative.

Let’s take a look at Supermicro’s investment outlook and see if the stock deserves a place in your portfolio.

Supermicro’s business is booming, but…

Perhaps the hottest area in the AI ​​world is semiconductorsDemand for graphics processing units is skyrocketing (GPUs) as generative AI applications continue to evolve.

For now, Nvidia, AMD, Inteland other chip designers have become the biggest names in the GPU market. While Supermicro works with many chip companies, it is not a semiconductor company itself.

Supermicro specializes in computing infrastructure. The company designs architectural solutions such as storage clusters for high-performance GPUs.

The revenue trends shown below illustrate how increased demand and purchasing activity around chips has served as a barometer for Supermicro’s services over the past two years.

While the new revenue growth is encouraging, investors should be aware of some weaknesses regarding Supermicro.

…there is more than meets the eye

While the growing demand can be seen as a good thing for Supermicro, it must be kept in mind that building IT infrastructure is an expensive business.

Take a look at the dynamics in the charts below. Over the past few quarters, Supermicro’s capital expenditures (capex) have exploded. The idea I’m trying to convey here is that as the company’s revenues are growing, so are its expenses.

This dynamic has a direct impact on Supermicro’s margin profile. As observed below, Supermicro’s gross margin is currently stagnant.

Certainly, the financials analyzed above are not necessarily a reason to run away. However, there are a few other potential issues to explore when it comes to Supermicro.

Keep in mind that the semiconductor sector is a cyclical industry. Right now, chip companies are experiencing something of a renaissance fueled by AI euphoria. But like any other type of business, supply and demand trends will eventually normalize.

The story continues

This could be a problem for Supermicro in the long run. It’s hard enough to predict demand for any product, let alone cutting-edge chips used for breakthrough applications in AI. These themes make me worry that Supermicro…