Should You Buy Super Micro Computer Stock Before October 1st?

When a stock is in the middle of a free fall, it can be a risky time to buy. This is because it is hard to know if it has bottomed or if it is still going down. It may seem like a cheap buy, but if the business is in trouble, it’s still not worth investing in.

Super Micro Computer (NASDAQ: SMCI) it was once seen as a top artificial intelligence (AI) stock. Its servers have been in high demand for companies looking to upgrade their technology capabilities and also provide businesses with crucial IT infrastructure. But in the past six months alone, the stock, also known as Supermicro, has fallen more than 60 percent. Investors can’t seem to get rid of stocks fast enough.

But could Supermicro’s upcoming stock split help it reverse its fortunes and lift its stock again?

What Supermicro’s 10-for-1 Split Means for Investors

Last month, Supermicro announced that it would split its stock on a 10-for-1 basis. And October 1st is when the stock will trade after the split. That means instead of trading at $400 a share, the stock price will be around $40 — assuming it doesn’t move much from where it is now.

For investors, this is the main difference they will see. In your portfolio, the total value of the investment will remain unchanged, you will simply have 10 times more shares and the price will be one tenth of what it was before the split.

But at a lower price, some investors may be more inclined to buy shares in the company if, for example, they cannot own fractional shares or if they prefer not to. Beyond that, though, there’s no obvious benefit to the stock split — it’s just a superficial change that shouldn’t affect your decision to buy or sell Supermicro stock. Unless there is drastically significant news coming out on October 1st, AI stock will be as good or as bad as it was the previous trading day.

Investors should focus on fundamentals

For investors, what should always remain the focus is the fundamentals. Whether the business is growing at a fast pace, whether it is profitable and how strong its cash flow is are some of the most important things to consider.

Even the recent short report on the company is not important. These reports can be biased, misleading, and are often wrong in many, if not all, ways. While stock splits and short reports may have a temporary impact on a stock’s price, they are unlikely to determine its long-term performance.

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Supermicro has been a strong growth stock to own this year, thanks to the strength of its business and strong demand for its servers and other IT infrastructure. However, one area of ​​concern was its low gross margin. Without higher margins, Supermicro’s revenue growth may not result in a much stronger bottom line, and that could make the stock look expensive if its stock price rises but its earnings per share don’t grow significantly.

Those are the kinds of things that investors should consider in their decision-making process, as opposed to stock splits or short reports.

Should you buy Supermicro stock?

Investors shouldn’t be bearish on Supermicro shares because of the recent short report, but they shouldn’t be terribly excited about a stock split either. Although business has been booming with Supermicro’s sales doubling in recent periods, I would wait a few quarters to see how the company fares and if its margins improve before making a decision on the stock. If they don’t improve, I’d pass on the stock, as a low gross margin can be a cause for concern.

But if you’re willing to take some risk and trust that the company can fix these issues, it might be worth adding the stock to your portfolio, as it’s trading at a fairly low 11 times estimated future earnings. That’s an incredibly low multiple for a tech stock and could justify taking the risk, as the upside could be massive if Supermicro proves its doubters wrong. This isn’t a stock that will be suitable for risk-averse investors, but if you have a high risk tolerance, it might be worth buying today — no need to wait until October.

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David Jagielski has no position in any of the listed stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Should You Buy Super Micro Computer Stock Before October 1st? was originally published by The Motley Fool