Ukraine – 10/12/2023: In this photo illustration, the logo of Supermicro (Super Micro Computer Inc.) is displayed on the screen of a smartphone… (+). (Photo illustration: Pavlo Gonchar/SOPA Images/LightRocket, Getty Images)
SOPA Image/LightRocket (via Getty Images)
Super Microcomputer stock (NASDAQ: SMCI) has experienced considerable volatility this year. Super Micro Computer is a data center solutions provider that sells server systems, server boards, storage, networking solutions, management software, and installation and maintenance services. SMCI’s stock price has increased nearly eight times over the past two years, driven by strong demand for servers from AI data centers and a recent 1-for-1 stock split. It is now about $47 per share, up from about $6 per share in September 2022. However, since the beginning of this year, the stock has fallen sharply due to concerns about gross margins, supply chain issues, and delays in filing for 10K following accusations of accounting fraud by short seller Hindenburg Research. So should you buy, hold, or sell supermicro stocks?
Recent analyzes have claimed mixed results. On the other hand, the stock price could more than double to $1,000. On the other hand, it presented a counter-case showing that supermicro stocks could fall to levels around $200 per share.
Impressively, SMCI stock has produced better returns than the broader market in each of the past three years. The stock returned 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, Trefis’ high-quality portfolio, a collection of 30 stocks, has significantly lower volatility. And it has outperformed the S&P 500 every year over the same period.
why is that? As a group, Headquarters portfolio stocks carried less risk and delivered better returns compared to the benchmark index. It’s not been a roller coaster ride, as evidenced by the performance metrics of our corporate portfolio.
Given the current uncertain macroeconomic environment surrounding interest rate cuts and multiple wars, could SMCI rise significantly?
Let’s start with the bad part first.
There are concerns about whether demand can be maintained. The underlying economics of the broader AI ecosystem remain questionable at this point, and most AI customers remain in the red. Building and training large language models is also expensive. We may be in an AI “FOMO phase” where companies feel they have to invest in AI just because they have competitors. As Supermicro’s end customers seek higher returns, capital spending may cool, impacting growth. Additionally, most AI companies are currently in a compute-intensive training phase, and as they move into a less compute-intensive deployment phase, demand for computing power and server equipment may cool. This could also adversely affect demand for Super Micro’s server systems, server boards, storage and networking solutions.
The corporate governance concerns raised by Hindenburg Research warrant close attention, but the full extent of the issue remains unclear. Short sellers claim that Supermicro may have recorded incomplete sales and improperly recognized revenue by bypassing internal controls. Additionally, the company has been accused of questionable relationships with related parties, particularly suppliers with ties to the CEO’s family. Hindenburg also highlighted that the company rehired executives involved in past scandals shortly after settling with the SEC. While these issues are concerning, more information is needed to fully assess the situation.
Additionally, Super Micro’s margins are also weak. Net profit margin expanded from 6% in FY2022 to approximately 9% in FY2014 due to increasing economies of scale, but sales decreased and competition intensified, reducing the company’s sales volume and pricing power. In this case, net profit margins may decline significantly. Additionally, SMCI has faced some pressure on its gross margins in recent quarters due to a higher proportion of sales of water cooling systems, which have higher production costs, and this trend is likely to continue. The server market has also become highly commoditized. Super Micro has some competitive advantages as its products are considered more customizable, but the company’s lead in these areas is not insurmountable and competition is significantly It may intensify.
good and great
While early AI models introduced by OpenAI and others in 2022 were primarily text-based, models are becoming increasingly multimodal, capable of processing audio, images, video, and 3D content, and are Computing power and more GPU shipments are in demand. . Additionally, unlike a decade or so ago, when advances in computing power, especially processors, outpaced the development software that could take full advantage of these powers, in the AI era, the demanding computational requirements of machine learning demand is rapidly increasing. model. If computing requirements continue to trend upward, Super Micro may also see increased demand as companies require infrastructure tools to support their expansion.
Changes in US monetary policy could also push SMCI higher. The Fed’s 50 basis point cut, the first in nearly four years, brings the federal funds rate to 4.75% to 5%, leaving room for further cuts. Lower interest rates boost growth sectors such as high-tech by increasing the present value of future earnings. A rate cut would be particularly beneficial for SMCI. why? Lower interest rates could reduce financing costs for builders of large data centers and increase capital spending in the sector. Additionally, the economics of the AI revolution remain complex given the high costs of model training and inference. Lower interest rates may improve the financial viability of these investments. Check out our analysis on other ways to profit from the Fed’s next move.
Although the server market has become commoditized, Super Micro has several competitive advantages as its products are considered more customizable and energy efficient than its competitors. Super Micro customers are also increasingly choosing more premium products. For example, the company estimates that 30% of server racks shipped next year will be equipped with expensive liquid cooling systems for servers, which were relatively rare in the pre-AI era. The company is also steadily increasing its production capacity. For example, we are building a new facility in Malaysia that will be able to produce more than 5,000 racks of server kits per month. This will allow the company to grow its revenue over the long term.
So what should I do?
Answer: Adding SMCI to your portfolio allows you to tolerate a 50% loss at any time during the period while assuming a 5x return over the long term. Yes, be willing to endure the short-term pain, the price you pay, for the long-term reward. This sounds easy in theory, but it’s far from easy in practice.
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Comparison of SMCI returns and Trefis Reinforced Value portfolio
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