Is Super Micro Computer stock a buy now?

After a great start to the year, Super Micro Computerhis (SMCI 4.59%) The stock chart has undergone a sharp reversal in the last six months. It has lost nearly 60% of its value since its peak, and recent developments appear to have further eroded investor confidence in the company.

First, the fourth-quarter 2024 results it released on Aug. 6 fell short of Wall Street expectations, and management’s guidance was disappointing. Second, short seller Hindenburg Research released a report alleging accounting irregularities at Supermicro. Then Supermicro’s management announced it was delaying filing its annual report, which only added to the negative press.

These factors explain why Wall Street analysts have downgraded the stock recently. But with the server and storage system maker’s stock now trading at an attractive 22 times trailing earnings and 13 times forward earnings, opportunistic investors may be tempted to buy Supermicro. Should they do so in light of recent developments?

Addressing the elephant in the room

Investors should note that Hindenburg is a short seller and has a financial interest in seeing Supermicro’s share price fall. In this context, we cannot be sure that the accusations that Hindenburg makes are valid, especially considering that the short seller has been wrong in the past. That said, Supermicro was charged by the Securities and Exchange Commission (SEC) with accounting violations in August 2020 when it was found to have prematurely recognized revenue and understated its expenses over a three-year period.

However, the company has made a remarkable recovery since then, posting remarkable gains over the past two years thanks to a new catalyst in the form of artificial intelligence (AI). Its revenue in fiscal 2024 doubled to $14.9 billion from $7.1 billion the previous year. Non-GAAP earnings rose to $22.09 per share from $11.81 per share in fiscal 2023.

Addressing the delay in Supermicro’s annual filing, management clarified that “we do not anticipate any material change in our fourth quarter or fiscal 2024 financial results.” It added that the company is looking forward to a “historic” 2025, with “a record number of orders, a strong and growing number of design wins and market leadership positions in a number of areas”.

Supermicro says the recent developments will not affect its production capabilities and is on track to meet demand for its AI server solutions. It’s worth noting that Supermicro expects its fiscal 2025 revenue to reach between $26 billion and $30 billion. That would be another year of remarkable growth from $14.9 billion in fiscal year 2024.

While it faces margin challenges from increased investments it is making as it ramps up capacity to meet strong demand for its liquid-cooled server solutions, management is confident it will return to normal margin range before the end of the fiscal year . Analyst consensus estimates also indicate that Supermicro’s earnings are on track to grow at an incredible pace in the current fiscal year, followed by healthy jumps in the next two years as well.

SMCI EPS estimates for current fiscal year data by YCharts.

What should investors do?

The delay in Supermicro’s annual filing resulted in JPMorgan cut the stock from overweight to neutral and cut its price target to $500 from $950. Even Barclays downgraded the stock to equal weight from overweight, citing margin pressure facing Supermicro as well as the filing delay. However, JPMorgan’s downgrade was not a result of the Hindenburg report or a reflection of its ability to become compliant, but due to the near-term uncertainty surrounding the company and the lack of a compelling case to buy the stock.

So risk-averse investors would do well to wait for more clarity before buying this AI stock. However, those with a higher appetite for risk looking to add a fast-growing company to their portfolios can consider buying Supermicro now. It looks capable of sustaining its impressive growth in the long term due to the huge opportunities it has in the AI ​​server market.

Analysts expect Supermicro’s earnings to grow at an annual rate of 62% over the next five years. If the company can overcome its current woes, it could prove to be a solid investment given the valuation it’s currently trading at.