Is Super Micro Computer stock split at $729 per share?

Companies that decide to split their stock — increasing the number of shares and lowering the price per share — usually do quite well. Most companies don’t announce stock splits unless their stock has grown significantly over time.

However, there are occasions when a stock split occurs during a difficult time for the company’s stock. This is the case for Super Micro Computer (SMCI 4.07%)whose stock has fallen 35% since the split was announced in early August.

However, many Wall Street analysts believe there is massive potential for Supermicro. So is it time to buy?

Supermicro’s business is booming

On September 25, a group of 16 analysts had an average one-year price target on Supermicro stock of $729.19. That represents a roughly 60% premium to the stock’s closing price on September 25, which was a day before a Wall Street JournalThe article contributed to a 12% decline.

Optimism makes sense. Super Micro Computer manufactures components for computing servers. While this space is relatively crowded, Supermicro sets itself apart from the competition by offering highly customizable servers that can be tailored to any type of workload or size. Its products are also some of the most energy efficient, which can save long-term operating costs.

With the massive increase in computing demand caused by the artificial intelligence (AI) arms race, Supermicro is benefiting from the same trends that have Nvidia stock through the roof, although Supermicro’s run has been a bit bumpier.

Supermicro isn’t firing on all cylinders right now

Along with Supermicro’s 10-for-1 stock split announcement on Aug. 6, the company announced its fiscal 2024 fourth-quarter and full-year results for the period ended June 30. While the company posted strong revenue growth of 143% over the previous year and provided excellent guidance for 2025 with growth of 74% to 101%, there were some issues with its profitability.

As its new line of liquid cooling products grew, Supermicro’s gross margin took a hit.

Data by YCharts.

This has caused significant concern among some investors, as the decline in gross margin may also indicate increased competition. However, management believes its gross margin will recover during fiscal 2025.

Meanwhile, short-selling firm Hindenburg Research published a report on Supermicro on August 27 alleging accounting manipulation. The SEC has fined Supermicro for accounting issues in the past. At the same time, because Hindenburg is a short seller, it benefits when the stocks it reports on fall, so investors should proceed with caution with this information. Supermicro responded that the short report “contains false or inaccurate statements.”

On August 28, Supermicro delayed its year-end Form 10-K filing with the SEC, saying it needed more time to “complete its assessment of the design and operational effectiveness of its internal controls over financial reporting.”

After the delay, Supermicro received a letter of non-compliance from the Nasdaq exchange, stating that it was in violation of listing rules by not filing its 10-K on time. After receiving the letter on September 16, Supermicro has 60 days to comply or face delisting.

To further complicate matters, on September 26, The Wall Street Journal reported that anonymous sources said the Justice Department had launched an investigation into the company. If the reporting is correct, this is only a preliminary investigation, so nothing can come out of it. However, there could be real problems with the company, which significantly increases the risk of investing in the stock. It will likely be a long time before the public gets full details, so investors will have to be patient with the stock if they choose to buy it.

The company is clearly in serious trouble right now, and the stock is down more than 60% from its 52-week high. However, the business case for its components and servers is undeniable.

Current stocks are also valued fairly cheaply based on forward earnings.

SMCI PE Ratio data (before) by YCharts

If Supermicro can improve its gross margin over the next year and dispel concerns about its accounting practices, the stock has plenty of upside.

I recently bought the dip because I believe in the company. However, I kept the position size low (about 1% of my total portfolio value). That way, it won’t hurt the portfolio too much if the stock continues to fall, but can still benefit if Supermicro pulls off a turnaround like some on Wall Street believe it can in the near term. I was planning to buy more, but after reporting a potential DOJ probe, I’m comfortable with the current position size because it represents the high risk and high reward associated with Super Micro Computer stock.