Where will the super micro computer stock be in a year?

With shares down nearly 40% in the last 30 days alone, Super Micro Computer (SMCI 8.60%) the rocket rally explodes. The stock is now trading at a level not seen since late January, erasing nearly seven months of gains in an instant. The company is reeling after weaker-than-expected profitability. Let’s explore what they might have in store next year.

The poor earnings of Super Micro Computer

A great company doesn’t always make a good investment because its valuation can be priced into unrealistic future expectations. That was one of the challenges Supermicro faced in its fourth-quarter earnings.

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Net sales up 144% year after year to $5.3 billion, driven by growing demand for the company’s AI infrastructure. However, analysts were disappointed by the company’s adjusted earnings per share (EPS), which came in at $6.25 compared to expectations of $8.07. While Supermicro’s business is booming, profitability is under pressure due to lower gross margins, which fell from 17% to 11% year-on-year.

A somewhat shallow economic moat

Supermicro is known for transforming Nvidia (and other chip makers) graphics processing units (GPU) in ready-to-use computer servers. This niche has allowed it to tap into growing demand for AI chips as more data center customers race to build capacity.

However, Supermicro’s “middleman” business model is quite vulnerable. To begin with, the company relies on sourcing extremely expensive chips from its partners. And it is not well differentiated from other server manufacturers such as Dell Technologies or Hewlett Packard Enterprise, which operates a similar strategy. This competition could make it difficult for Supermicro to pass on costs to consumers or to boost its margins by raising prices.

This is a very different situation from Supermicro’s partner Nvidia, which managed to increase its gross margin from 76% to 78.4% in the first fiscal quarter as it locked out customers from using its products through popular software solutions like CUDA (optimized for Nvidia hardware). ) and a relentless upgrade cycle that can keep its chips technologically ahead of the competition.

According to management, Supermicro’s weaker-than-expected gross margins were primarily due to higher supply chain costs and limited inventory of key components. They expect this situation be resolved to the end of fiscal 2025 as manufacturing partners ramp up production, but highlights the company’s ongoing challenge. economic moat. And it could appear again in the future.

What does the next year hold for Supermicro?

The next 12 months is modeled up to to be a break period for Supermicro. Storm clouds are gathering over the US economy as unemployment rises and consumer spending rises it starts to freeze.

Analysts at JPMorgan predict a 35% chance of a US recession by the end of the year, which could wreak havoc on the AI ​​industry.

Usuallywhen macroeconomic conditions weakencompanies are tightening their belts by reducing speculative and unprofitable investments. Consumer-oriented AI algorithms would likely fall into this category, as they struggle to generate enough revenue or profit to justify the massive capital expenditure required to run and train them. Supermicro could be particularly vulnerable to a downturn because its business already faces significant competition and margin pressure.

Is Supermicro stock undervalued?

With a the forward price-earnings ratio (P/E) multiple of just 14, Supermicro shares are shockingly cheap. For context, S&P 500 has an average estimate of 22, while market leader Nvidia boasts 40. It’s hard to see why a company growing at a triple-digit rate should trade at such a discount, especially if it manages to -keeps its gross margins under control.

That said, despite Supermicro’s attractive discount, investors should be cautious when betting on any AI-related stock right now due to the speculative and unproven nature of the industry and the growing risk of a US recession in the next 12 months .