Super microcomputer stock rises after fainting after earnings

Key recommendations

• Shares of Super Micro Technology posted solid gains on Monday, recouping some of the losses after last week’s earnings report.

• Shrinking margins have contributed to pressure on the stock, but Supermicro said it sees a path to improving margins through manufacturing efficiencies.

• A report published over the weekend highlighted the potential of Supermicro’s direct liquid cooling technology.

Super Micro Computer (SMCI) shares rose more than 6% on Monday, recouping some of last week’s steep losses after the server and data storage company posted fiscal fourth-quarter earnings.

In its latest set of quarterly numbers, released after the closing bell on Tuesday, the server maker reported revenue more than doubled from a year earlier, beating analysts’ sales forecasts. However, profits missed expectations and Supermicro shares fell 20% the next day.

Supermicro sees path to margin recovery

Although Supermicro forecast further sales growth, rising costs contributed to a decline in margins that appeared to underpin the negative reaction to the earnings report. Bank of America analysts downgraded the stock to “neutral,” saying they expect margins to remain tight in the coming quarters.

In its earnings call, Supermicro attributed the decline in gross margins to product mix, competitive pricing aimed at delivering new design wins and high upfront costs involved in ramping up production of direct liquid cooling (DLC) technology for unit clusters of graphics processing used in artificial factories. intelligence (AI) data centers.

As DLC production ramps up, the company believes it can lower production costs to drive margin recovery.

Liquid cooling technology kit for growth

In addition to the company’s claim that the preliminary cost headwinds should be temporary, a report over the weekend in The Wall Street Journal suggested that Supermicro’s investments in liquid cooling technology could pay off. The article highlighted liquid cooling as a “new method” to help AI data centers without relying so heavily on power-hungry air conditioners.

Supermicro shipped more than 1,000 liquid-cooled AI racks in June and July, according to the report, and about 30 percent of the server racks the company will ship next year will incorporate liquid cooling.

Stock performance

Following last week’s losses and Monday’s recovery, Supermicro shares have gained nearly 90% so far in 2024.

Read the original article on Investopedia.