Should You Buy Super Micro Computer Stock Before the 10-for-1 Stock Split? This is what history shows.

On August 6, along with results from the fourth quarter of fiscal 2024 (ended June 30), Super Micro Computer (SMCI 4.59%)commonly called Supermicro, has announced plans to initiate a 10-for-1 stock split. As a result of the split, shareholders will receive nine additional shares for every share of common stock they already own. The split will take place after the market closes on Monday, September 30. Shares will begin trading on a split-adjusted basis on Tuesday, October 1.

Stock splits tend to generate a lot of buzz among investors, and Supermicro is no different. Additionally, the company’s robust performance over the past two years has fueled a spectacular share price rally, as the stock has gained 433% since the start of last year (as of this writing).

After gains of this magnitude, investors are left to consider the question: Is Supermicro stock a buy ahead of its high-profile stock split? Let’s see what history has to say.

Image source: Getty Images.

An object in motion tends to stay in motion

Market historians will note that this is the first time Supermicro has initiated a stock split in its 17 years as a public company, so there is no history to review. Fortunately, there are other resources investors can use to provide insight into how Supermicro’s stock might perform post-split.

Research by analysts from Bank of America revealed that companies that initiated stock splits generated returns of 25% in the 12 months after the stock split was announced, compared to returns of just 12% for the broader index of S&P 500.

To be clear, the catalyst for the additional gains was not the stock split itself but rather the strong business and financial results that precipitated the stock split.

Investors can learn valuable lessons from other fields of study, and one seems particularly apt. Sir Isaac Newton’s first law of motion states that an object in motion tends to stay in motion unless acted upon by an external force. In other words (and when applied to investing and stock splits), winners tend to keep winning.

By the numbers

While there’s certainly potential for short-term gains over the next year or so, long-term investors will still want to know if Supermicro’s stock is a buy ahead of its high-profile stock split. A review of the company’s recent results can be instructive.

In the fourth quarter of 2024 (ended June 30), Supermicro reported record revenues that rose 143% year-over-year to $5.31 billion, while growing 38% quarter-on-quarter. This led to adjusted earnings per share (EPS) rising 78% to $6.25.

While results of this magnitude would normally be cause for celebration, investors were concerned about the company’s lower-than-expected profit margin.

In prepared remarks, CEO Charles Liang said this resulted from the “higher mix of large-scale data center business and accelerated costs of our direct liquid cooling (DLC) components in the June and September quarters.” .

He also noted a lack of “key new components” that drove $800 million in revenue next quarter. Finally, Liang said Supermicro’s “dominant position in DLC” and the Malaysian manufacturing facility coming online later this year will be “instrumental in increasing our profitability.” This suggests that any margin pressure will be short-lived.

For the company’s fiscal first quarter 2025, management is guiding revenue in the range of $6 billion to $7 billion, which would represent year-over-year growth of about 206%. The company is also forecasting adjusted EPS growth of 118% at the midpoint of its guidance.

Management clearly expects Supermicro’s growth to continue.

I would be remiss if I didn’t address the elephant in the room. The general weakness in artificial intelligence (AI) stocks of late, the aforementioned decline in its profit margin and largely unfounded allegations of a short seller have combined to weigh on Supermicro’s share price, currently down by 63% from its peak. Investors hate uncertainty, which explains the rampant selling. However, considering the company continues to be strong performancei would respectfully say the sale is over the top.

Is Supermicro a buy?

It’s still early innings for generative AI, which is the driving force behind Supermicro’s recent fortunes. According to Expert Market Research, the global AI market was estimated at $2.4 trillion in 2023 and is expected to grow more than 12 times to $30.1 trillion by 2032, representing a compound annual growth rate of 32%.

If Supermicro continues to dominate the high-end server market, it will be well-positioned to earn its share of the ongoing AI profits. Additionally, at just 22x earnings and less than 2x sales, Supermicro is attractively priced, especially in light of the significant opportunity currently unfolding.

On the available evidence, the Super Micro Computer is a buy. And given the considerable opportunity and low price, I’d say now is as good a time as any.