Should You Buy Super Micro Computer Before The Stock Splits?

Super Micro Computer (SMCI 1.39%) has been one of the biggest winners of the artificial intelligence (AI) boom.

Even after the pullback in recent months, Supermicro, as the company is also known, is still up nearly 700% since the start of 2023, almost equal to Nvidia as shown in the graph below.

SMCI data by YCharts.

The company, which makes high-density servers that are particularly well-suited to running AI applications, has done so by boosting Nvidia’s numbers, with revenue rising 144% in its recently reported fiscal fourth quarter.

In response to the stock surge, Supermicro recently decided to reward investors with a 10-for-1 stock split, effective October 1. The company said it is splitting the shares to make them more affordable.

Should you buy Super Micro Computer before the stock split? Let’s take a look at the evidence.

Image source: Getty Images.

Recent performance is mixed

There’s no doubt that Supermicro is experiencing upward growth, but there’s been an imperfection in the company’s record, and that’s one of the reasons why the stock fell after its recent earnings report. Gross margin fell even as revenue rose. In the fourth quarter, the company reported a gross margin of just 11.2 percent, down from 17 percent in the year-ago quarter. This translated into lower operating margins for Supermicro as well, falling to 6.5% from 10.3%.

The good news is that the company expects to recover its gross margin, saying that supply chain bottlenecks have driven up prices for new components, but they should come down over the next year. Management also said long-term gross margins will benefit from lower production costs in production in Malaysia and Taiwan. It also plans to expand to America and Europe.

If margins recover next year, the stock should move higher.

Will stock split help?

Investors should understand that a stock split does nothing to change the fundamental value of a stock; it just divides the proverbial pie into more pieces, making individual shares cheaper.

There is also some evidence that stocks have outperformed S&P 500 in the 12 months following the stock split, according to research from Bank of Americawhich found that stocks that split gain an average of 25%, compared to only a 9% gain for S&P 500. This could be because stock splits tend to follow strong stock price momentum and partly results from management confidence in the business.

However, at least some evidence seems to contradict these findings. Nvidia, for example, the stock driving the AI ​​boom and a close partner of Supermicro, issued a 10-for-1 stock split on June 7. Since then, the stock is up just 1.5%, slightly behind the S&P 500’s 3.5%.

Chipotle The stock peaked just before the 50-for-1 stock split on June 26 and has since fallen 21%.

Celsius Holdingsthe energy drink maker, is down 20% since its 3-for-1 split last November and Broadcomthe networking chip specialist, has fallen 3% since its July 15 10-for-1 split, compared with a 0.5% decline for the S&P 500 over the same time frame.

Clearly, a stock split is no guarantee of performance, even if the stock split has outperformed its historical average.

Should you buy Supermicro before October 1st?

Whether you’re an AI stock investor or a split stock investor, the good news is that Supermicro’s pullback creates an attractive opportunity to buy the stock, as it’s down nearly 50% from its March peak when it was admitted to the S&P 500 .

Super Micro Computer now trades at a price-to-earnings (P/E) ratio of 31, which looks like a bargain for a stock that still has plenty of upside potential and is expected to see expanded margins in the coming years.

Supermicro has a number of competitive advantages that should help it continue to thrive in the AI ​​server market, including a close relationship with Nvidia and expertise with high-density servers. In addition, the company is a leader in direct liquid cooling (DLC), a key technology for optimizing hardware performance. CEO Charles Liang recently said, “We want 25% to 30% of new global data center deployments to use DLC solutions in the next 12 months, with the majority of deployments coming from Super Micro.”

The stock split alone isn’t a good reason to buy the stock, but given Supermicro’s strong growth prospects, attractive valuation, and larger, long-term opportunity in AI, buying ahead of the stock split looks like a brilliant move.