Every investor in super micro computer stocks should keep this number in mind

Super Micro Computer (SMCI 1.99%) the stock has further risen by more than 1,000% over the past three years due to growing demand for its artificial intelligence (AI)-related high-performance rack servers. Its share price is also down 66% from its peak earlier this year.

While a wide range of factors will play a role in shaping the future performance of the server specialist’s stock, investors should pay particular attention to one key stock.

Gross profit margins will be critical to Supermicro’s stock performance

Gross profit is calculated by subtracting the cost of producing a product from the revenue generated from the sale of that product. Gross profit margins are a key indicator of pricing power and have a major impact on the overall profitability of a business. In particular, Supermicro’s gross profit margins have been on a downward trend lately.

SMCI gross profit margin data (quarterly) by YCharts

The company’s gross margin fell to 11.2 percent in the fourth quarter of its 2024 fiscal year, which ended June 30. This performance was down from a 15.5% gross margin in the third quarter last year and a 17% gross margin in fiscal Q4. 2023.

Supermicro’s high-performance rack servers are built around graphics processing units (GPUs) from Nvidia and hardware from other vendors. Following an increase in sales and margins driven by AI-related demand, reliance on third-party hardware could set the stage for gross margin contraction.

Supermicro is betting on strong pricing power and differentiating its products through liquid cooling technologies. Packing and running a bunch of high-powered GPUs and other hardware together can generate a lot of heat, and overheating can lead to system crashes and permanent hardware damage.

If Supermicro’s liquid cooling technologies for servers prove to be a major selling point, that could boost the business’s gross margins and drive a strong stock performance. If not, competitive pressures and moderating demand may drag the company’s gross margins and stock price lower.