This top-grossing stock just announced a 10-for-1 stock split: Here’s why you should pre-buy it right now

Super Micro Computer (SMCI 0.34%) announced fourth-quarter 2024 results (for the quarter ended June 30) on Aug. 6, and shares fell 20 percent as investors worried about the company’s declining margin profile.

Supermicro’s revenue has grown remarkably year over year, and its guidance for fiscal 2025 indicates that its astounding growth is here to stay. Additionally, management announced a 10-for-1 stock split that will take effect on October 1. However, the fact that the company’s earnings of $6.25 per share missed analysts’ expectations of $8.12 per share by a mile sent the stock down. packaging.

Will a stock split help change the fortunes of Supermicro stock?

A stock split is nothing more than a cosmetic move that does not change the fundamentals of a company. So expecting Supermicro’s stock to rise following this announcement when it failed to meet Wall Street’s expectations won’t make sense. A stock split simply increases the number of outstanding shares of a company by reducing the price of each share. Its market capitalization remains the same.

An investor who now owns one share of Supermicro — which trades at about $510 — will own 10 shares post-split, worth $51 each. It is believed that reducing the price of each share through a forward split makes stock ownership accessible to a wider group of investors, thereby increasing demand for a company’s stock.

With Supermicro’s stock rising phenomenally through early 2024, there was a possibility that the stock could split its shares to lower the price per share. But as we’ve already discussed, a stock split won’t impact Supermicro’s growth prospects and is unlikely to break the stock out of the rut it’s in (it’s down 44% since early March).

However, a closer look at the company’s latest results, guidance and valuation will tell us that buying this company after its steep pullback could be a smart move. Here’s why.

Supermicro’s red growth is here to stay

Supermicro ended fiscal 2024 with revenue of $14.94 billion and non-GAAP (generally accepted accounting principles) earnings of $22.09 per share. The top line grew 110% year-over-year, while earnings rose 87%. However, the company — known for making servers and storage systems — saw its margins shrink in the last quarter.

Supermicro’s gross margin fell to 14.2% in fiscal 2024 from 18.1% in fiscal 2023. This margin pressure can be attributed to the investments Supermicro is making to increase its server production capacity. artificial intelligence (AI), which are in high demand. and generating a tremendous increase in its income. It’s worth noting that 70% of Supermicro’s revenue last quarter was from sales of its server solutions used to implement AI graphics processing units (GPUs).

Not surprisingly, Supermicro is increasing its production capacity so that it can capture a larger share of the AI ​​server market. For example, Supermicro is aggressively ramping up production of Direct Liquid Cooling (DLC) servers. This is a smart thing to do, as the market for liquid-cooled servers is expected to be worth $21 billion in 2029, compared to $5 billion this year, due to their increasing adoption in data centers AI that consumes huge amounts of electricity and generates a lot of heat.

On the bright side, Supermicro’s management expects “short-term margin pressure to ease and return to normal ranges before the end of fiscal 2025, especially as DLC (liquid cooling) and DCBBS (data center block solutions) will begin to be delivered. in large volume.”

This explains why Supermicro expects another year of solid revenue growth in fiscal 2025. The company expects full-year revenue to be between $26 billion and $30 billion, meaning that he could double his profit if he succeeds in reaching the top level. of his forecast. Also, the midpoint of the company’s fiscal Q1 non-GAAP earnings guidance of $7.48 per share means its bottom line is set to more than double the figure from the year-ago period of 3, $43 per share despite margin pressure.

We’ve seen management expect margins to start improving as the fiscal year progresses, so there’s a good chance they’ll end the year with sharp growth in the bottom line as well. So savvy investors would do well to take advantage of this AI stock’s pullback, as it now trades at just 14 times forward earnings and 2 times sales, despite posting remarkable growth in both revenue and earnings.

Both multiples are lower than the US tech sector’s average sales multiple of 7.3 and earnings multiple of 42, making Supermicro stock an unusual buy right now given how quickly it’s set to increase in the new fiscal year.