Super Micro’s shares sink despite rising revenue and stock split. Should Investors Buy Declining Stocks?

Following its fiscal fourth quarter earnings reportactions of Super Micro Computer (SMCI 8.64%) fell 20% in the next trading session, even as the server solutions company announced a stock split and issued strong revenue guidance. Despite the pullback, the stock is still up about 70% on the year.

Let’s take a closer look at the company’s quarterly results, why it sold off, and whether investors should be looking to buy the dip.

Strong sales and guidance, but margin concerns

For its fiscal fourth quarter, Super Micro posted a 143% increase in revenue to $5.31 billion, which was roughly in line with what analysts expected. However, its earnings per share (EPS) of $6.25 fell well below expectations of $8.07 due to the gross margin pressure the company experienced this quarter.

Gross margin, which measures the difference between the price a company sells its products or services for versus what it costs to provide those products or services, fell to 11.3 percent from 17 percent a year ago and 15.5 percent in the quarter last. Lower margins resulted from product mix, reduced pricing to win new models, and higher costs associated with the growth of Direct Rack Liquid Cooled (DLC) AI GPU clusters. The company expects gross margins to gradually increase through fiscal 2025 and eventually return to the targeted range of 14% to 17%.

The company attributed its strong growth to its air-cooled AI GPU platforms and state-of-the-art DLC rack. Servers generate a lot of heat, and these systems help keep them cool to prevent them from breaking down while reducing energy costs. Super Micro has seen strong demand for its DLC systems as companies develop their data center capabilities to run artificial intelligence (AI) applications. It mentioned that it has over 70% market share in the DLC space.

Image source: Getty Images.

Despite its tremendous growth, Super Micro said the growth could have been even higher if it weren’t for the lack of DLC liquid cooling components. It estimated that revenue fell by about $800 million in July after the end of its fiscal fourth quarter due to component shortages.

Looking ahead, Super Micro estimates full-year tax revenue to be between $26 billion and $30 billion. That would be a 100% increase in revenue at the upper end of the forecast, after it generated $14.9 billion in revenue last fiscal year.

For its fiscal first quarter, it forecasts sales of $6 billion to $7 billion, with adjusted EPS of $6.69 to $8.27. The midpoint of the range of $7.48 was below the analyst consensus of $7.58.

The company also announced a 10-for-1 stock split. While a stock split doesn’t change a company’s fundamentals, a lower stock price can attract more retail investors to a stock.

Should investors buy the dip?

From a valuation perspective, Super Micro trades at a forward price-to-earnings (P/E) ratio of just 14, based on analyst estimates for fiscal 2025. Given its revenue growth, which is expected to double next year, this she is quite attractive. That said, it’s in a low-margin business, so it shouldn’t command multiples of a chip company like Nvidia or a software company like Microsoft either.

SMCI PE Ratio data (before) by YCharts.

The company is currently experiencing tremendous growth as it benefits from AI infrastructure and data center development, but it has to be somewhat concerning to see its gross margins so weak with demand for its products so high. This is not an indication of a business that has great moat or pricing power.

Given that fact, even after the recent sale, I’d probably wait a little longer on the sidelines with the Super Micro at this point.