Why Super Micro Computer is making a comeback today

Actions by the Artificial Intelligence (AI) Server Specialist. Super Micro Computer (SMCI 6.62%) were up in Monday trading, up 7.2% as of 12:04 a.m. ET.

The server maker fell last week after the company’s fourth-quarter earnings report, which showed rising revenue growth but also shrinking margins. But after last week, along with the recent sell-off in AI-related stocks, Supermicro and other AI names are coming back strongly today.

Helping the jump was a weekend Wall Street Journal article introducing the company’s new direct liquid cooling (DLC) products.

Liquid cooling could heat up SMCI growth

In its Aug. 6 earnings report, Supermicro actually forecast revenue growth of nearly 100% for the year ahead, which was well above analysts’ expectations, but for a short-term decline in margins. Management attributed this to accelerated shipping costs for direct liquid cooling components due to short-term excess demand for these solutions.

However, having so much demand that you have to pay for faster delivery of components is not the worst problem you have. Supermicro’s management also predicted that its margins would increase over the next 12 months.

this weekend Wall Street Journal featured a piece on Direct Liquid Cooling (DLC) technology. The article discussed NvidiaIts future Blackwell chip, which, when put into a GB200 server, will need to be liquid cooled.

Two weeks ago, The Information reported that Blackwell would be delayed, due to a design flaw discovered late in the process. However, various analysts weighed in over the weekend, saying concerns about the delay were overblown. UBS analyst Tim Arcuri reaffirmed his $150 price target on Nvidia, while saying the rollout will only last four to six weeks, leading to only a slight drop in his earnings per share forecast for this year.

If this is the case, then there should be a high demand for DLC solutions in the next 12 months, given that the GB200 servers require it. So a short delay probably wouldn’t hurt Supermicro’s strong outlook.

Also encouraging for Supermicro was WSJ article noting some issues in DLC testing related to leaks and other issues at some of Supermicro’s Asian competitors, including Hon Hai Precision Industryalso known as Foxconn, as well as two other unnamed suppliers. People familiar with the matter said recent social media rumors of leaks and failures could be attributed to normal problems that occur in regular product testing.

However, on last week’s conference call, Supermicro CEO Charles Liang noted that Supermicro has already shipped 1,000 liquid-cooled racks in both June and July, likely for Nvidia H100 and H200 servers , representing at least 15% of all global server deployments in those months. Liang also estimated that Supermicro accounted for at least 70% to 80% of all DLC servers shipped today.

So Supermicro is apparently the first to release working DLC ​​solutions. And if Blackwell is only a few weeks late, that could be a good combination for SMCI stock.

Investment in AI looks set to continue

The recent sell-off no doubt worries investors, but there’s really no evidence that AI investing is slowing down. In any case, big tech companies said this earnings season that they will continue to increase investment in AI this year and next. So as long as there is no severe recession, the recent pullback could be an opportunity to pick AI winners like Supermicro at a discount.