Super microcomputer inventory plummeted. Is this a buying opportunity?

One of the most volatile stocks in the past year or so Super microcomputer (NASDAQ: SMCI) After the company announced its shares in advance its first quarter revenue results, its shares continued to make substantial measures. Over the past year, the stock has lost two-thirds of its value.

The stock has been riding crazy roller coasters since a brief report asked the company’s accountants and accused other misconduct. The delay in its annual report, the Justice Department reported the company's investigation, and the resignation of its auditors only added to the conspiracy.

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However, the company is now the latest submission and reports full results, but it looks like they will be disappointing. Below, I'll take a closer look at Supermicro's announcement to see if this might be a buying opportunity for stocks.

For those unfamiliar with SuperMico, it is a hardware integrator that designs and assembles server and rack solutions that are fully configured systems that include networking, cooling and built-in power supplies. This is one of the first companies in the space to offer direct liquid cooling (DLC) (DLC). Server hardware generates a lot of heat, especially when running artificial intelligence (AI) workloads, DLC offers some good advantages over traditional air cooling.

The company tends to build and customize its systems NvidiaThe graphics processing unit (GPU), which is a key original equipment manufacturer (OEM) partner for chip manufacturers. Therefore, it benefits greatly from buildings with artificial intelligence (AI) infrastructure.

However, because the company is essentially an integrator for the middleman, its business has a lower gross margin. Despite its customization, it is in a commercialized field with low differences and intense competition. At the same time, it passes very expensive component costs (such as GPUs) to expand revenue, but it does not make much profit to gross profit.

Although Supermicro is in the notorious gross margin business, it still sees pressure in this regard. This began in the fourth quarter of the fourth fiscal year in June 2024, when its gross margin fell to 11.3% from 17% a year ago. At the time, the company said it had lowered its price in its pursuit of a new design victory. For the second phase, its adjusted gross margin remained tight at 11.9%.

For the company's latest quarter, gross margin issues have not disappeared. In fact, they got worse. Supermicro said its gross margin will be 220 basis points lower than fiscal year 2, which will drop to just 9.7%. This stems from the company's increased library storage for older generations of products, and then catching up with customers with the new generation.

Supermicro added that customers are delaying platform decisions, which shifted sales to its fourth quarter. As a result, it lowered its third-quarter revenue forecast from $5 billion to $6 billion range and to the new range of $4.5 billion to $4.6 billion.

It also lowered its adjusted earnings per share (EPS) forecast, from $0.46 to $0.62 to $0.29 to $0.31. A year ago, the company reported adjusted earnings per share of $0.66 (adjusted) of $3.85 billion. As a result, sales growth will be 18%, while its EPS appears to be expected to decline.

Metric system

Previous FQ3 Guide

New FQ3 Guide

income

$5 billion to $6 billion

$4.5 billion to $4.6 billion

Adjusted EPS

$0.46 to $0.62

$0.29 to $0.31

Source: Company News Release

The core of Supermicro’s problem seems to be the customer transition to NVIDIA’s New Blackwell chip. Blackwell is still constrained by capacity, but it seems customers are now more willing to wait for NVIDIA's latest chip architecture than to buy servers powered by older hopper chips. This could lead to Hopper inventory accumulation and future discounts.

This may be temporary in nature, but as Nvidia accelerates its new chip design to about once a year, this dynamic could become a more common situation. SuperMicro will have to learn to better manage its supply chains to better match inventory and demand in the future during these chip design transitions.

Data center.
Image source: Getty Images

The fiscal year analyst estimates that SuperMicro stock is not expensive with 12x forward value (P/E) below 12x. However, given its low gross margin and the commoditized nature of its business, the company has not reached a huge valuation in history.

SuperMicro is still being set up to benefit from the establishment of AI infrastructure, but it must manage its current inventory and margin issues. Meanwhile, the stock is still bearing some luggage related to its short-term allegations and filing delays.

Given recent market volatility, there are a lot of AI stocks being sold. I think there is a better way to play the AI ​​infrastructure boom.

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Geoffrey Seiler has no position in any of the stocks mentioned. Motley fool has a place and recommends Nvidia. Motley Fool has a disclosure policy.

Super microcomputer inventory plummeted. Is this a buying opportunity? Originally published by Motley Fool