Super microcomputer (SMCI)a provider of high-performance computing and AI infrastructure solutions, has seen significant volatility in its stock. The AI infrastructure company’s stock went parabolic in January 2024, only to crash after joining the S&P 500 (SPX). While a correction is warranted, it is now a bit overextended, especially given the impressive revenue forecasts. I am bullish on Super Micro due to its lower price and promising catalysts.
Profit Report Analysis
Super Micro closed fiscal 2024 with booming sales and promising outlook for the future. The company reported quarterly revenue of $5.31 billion, up 143% from $2.18 billion in the same quarter last year. In addition, net income increased 82% year-over-year to $353 million.
Those results are good, but investors have grown nervous because of the thin profit margins. As a reminder, Super Micro’s net income came in at $402 million in Q3 FY24, indicating a sequential decline of 12%. Meanwhile, the AI beneficiary reported revenue of $3.85 billion in Q3 FY24, meaning that Q4 revenue saw a sequential increase of 38%.
Profit margins are expected to continue to narrow in fiscal 2025, prompting massive selling. Even a 10-for-1 stock split couldn’t deter investors from rushing for the exits.
However, the guidance doesn’t justify the share price drop. Super Micro expects revenue to be between $26 billion and $30 billion for fiscal 2025, compared to $14.94 billion for fiscal 2024. The guidance suggests that revenue can more than double year over year (at the high end of the range), especially given Super Micro’s history of beating revenue expectations.
Although the company did not provide guidance for its net profit, it is expected to grow again year-over-year. The question is by how much. In any case, even if net profit growth slows to 30-50% year-over-year, it still presents a good long-term opportunity.
Margins can improve over time
Super Micro Computer remains committed to becoming the world’s largest IT infrastructure company and is well on its way to achieving that goal. As artificial intelligence continues to flourish, Super Micro is offering competitive pricing to gain market share.
The company is essentially trading higher profits for revenue. This is a short-term problem that CEO Charles Liang hopes to resolve before the end of fiscal 2025. The current margin issues shouldn’t deter long-term investors who intend to hold their positions for several years.
Assessment is the key
I sang a different melody about Super Micro Computer stock shortly before it joined the S&P 500. In that article, I expressed concerns about profit margins, stable revenue growth rates, and its valuation. Super Micro had a price-to-earnings ratio of over 80x when I wrote that article, indicating that the stock was perfectly priced.
Forecasts suggest that hypergrowth will continue for at least another year, which…
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