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This Is Why SMCI Stock is Falling, But Why It's Time to Buy
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The meteoric rise in demand for artificial intelligence (AI) chips has helped the $25 billion server manufacturer Super Micro Computer, Inc.’s (SMCI - Free Report) shares to scale northward over the last three financial years.
However, the SMCI stock tanked on Wednesday and may continue to do so for some time following a bearish short-seller report. But should investors sell the stock, or remain bullish and consider this as a buying opportunity? Let’s have a look –
SMCI Stock Tanks – Short Seller Claims Bad Accounting Practices
Investment research firm Hindenburg Research LLC alleged that Super Micro is a serial offender regarding accounting manipulation. Hindenburg conducted the research over the past three months and questioned Super Micro’s export control letdowns, customer-related issues, and unidentified party transactions.
The bearish report compelled Super Micro to announce that the company would delay the annual 10-K filing with the Securities and Exchange Commission (SEC).
Super Micro’s postponement of financial filing led to its shares plummeting 19% yesterday, while the SMCI stock was also trading in the red in after hours. The SMCI stock has plunged 65.5% from its record closing high of $1,188.07 on March 13.
Market Overreacting to the News
Investors may feel jittery about the SMCI stock, but Super Micro has assured that it will complete the filing within the stipulated extension period with minor performance revisions.
Moreover, it’s not the first time that Super Micro has faced issues related to accounting irregularities. The company successfully settled a penalty imposed by the SEC on accounting disparities for fiscal years 2014 to 2017. So, in a way, Super Micro can come out of problems related to accounting disclosures.
Market participants should, thus, ignore the newsflash and focus on Super Micro’s fundamentals. Bears may argue that SMCI’s gross margins have dropped from more than 15% in fiscal years 2022-2023 to 11.2% in the fiscal fourth quarter of 2024. Yet it’s true that the company has notched $14.94 billion in sales for fiscal 2024, up 110% from a year ago.
Super Micro’s earnings outlook for the current year looks encouraging due to an uptick in demand for graphic processing units and rack-scale solutions required for AI applications. SMCI stock’s $33.50 Zacks Consensus Estimate for earnings per share is up 86.3% year over year.
Image Source: Zacks Investment Research
SMCI Stock – Has a Scalable Business & NVIDIA’s Backup
NVIDIA Corporation (NVDA - Free Report) is taking advantage of the flourishing AI-chip markets, expected to witness a CAGR of 38.2% from 2023 to 2032, to $383.7 billion by 2032, per Allied Market Research.
Super Micro’s business is intertwined with NVIDIA since SMCI’s AI servers are needed to mount AI chips. Hence, the SMCI stock is expected to scale upward driven by the ever-expanding AI-chip market (read more: The Better AI Stock to Buy Now: NVDA or SMCI).
Super Micro has room to expand its business since it only accounts for 10% of the AI server market share, and is providing stiff competition to dominant players like Dell Technologies Inc. (DELL - Free Report) . The AI server market is estimated to witness a CAGR of more than 18% from 2024 to 2032, according to Global Market Insights.
This is because the SMCI stock has a return on equity (ROE) of 34%, way more than the Computer- Storage Devices industry’s 6.1%. As a thumb rule, any reading more than 20% is perceived to be very strong.
Image Source: Zacks Investment Research
SMCI Stock – Is Trading at a Discount
Despite yesterday’s hiccup and severe volatility in recent months, the SMCI stock has been able to outperform the industry year to date (+56% vs +51.8%).
Image Source: Zacks Investment Research
Still, SMCI stock is less expensive compared to its peers, which has given the stock a competitive edge. This is because, per the price/earnings ratio, SMCI trades at 13.2X forward earnings. However, the industry’s forward earnings multiple is 17.9X.
Image Source: Zacks Investment Research
Strong Price Upside for SMCI Stock
Banking on the positives, prominent brokers have increased the average short-term price target of SMCI by almost 68.5% from the stock’s last closing price of $574.64. The highest price target is set at $1,500, an upside of 173.9%.
Image: Bigstock
This Is Why SMCI Stock is Falling, But Why It's Time to Buy
The meteoric rise in demand for artificial intelligence (AI) chips has helped the $25 billion server manufacturer Super Micro Computer, Inc.’s (SMCI - Free Report) shares to scale northward over the last three financial years.
However, the SMCI stock tanked on Wednesday and may continue to do so for some time following a bearish short-seller report. But should investors sell the stock, or remain bullish and consider this as a buying opportunity? Let’s have a look –
SMCI Stock Tanks – Short Seller Claims Bad Accounting Practices
Investment research firm Hindenburg Research LLC alleged that Super Micro is a serial offender regarding accounting manipulation. Hindenburg conducted the research over the past three months and questioned Super Micro’s export control letdowns, customer-related issues, and unidentified party transactions.
The bearish report compelled Super Micro to announce that the company would delay the annual 10-K filing with the Securities and Exchange Commission (SEC).
Super Micro’s postponement of financial filing led to its shares plummeting 19% yesterday, while the SMCI stock was also trading in the red in after hours. The SMCI stock has plunged 65.5% from its record closing high of $1,188.07 on March 13.
Market Overreacting to the News
Investors may feel jittery about the SMCI stock, but Super Micro has assured that it will complete the filing within the stipulated extension period with minor performance revisions.
Moreover, it’s not the first time that Super Micro has faced issues related to accounting irregularities. The company successfully settled a penalty imposed by the SEC on accounting disparities for fiscal years 2014 to 2017. So, in a way, Super Micro can come out of problems related to accounting disclosures.
Market participants should, thus, ignore the newsflash and focus on Super Micro’s fundamentals. Bears may argue that SMCI’s gross margins have dropped from more than 15% in fiscal years 2022-2023 to 11.2% in the fiscal fourth quarter of 2024. Yet it’s true that the company has notched $14.94 billion in sales for fiscal 2024, up 110% from a year ago.
Super Micro’s earnings outlook for the current year looks encouraging due to an uptick in demand for graphic processing units and rack-scale solutions required for AI applications. SMCI stock’s $33.50 Zacks Consensus Estimate for earnings per share is up 86.3% year over year.
Image Source: Zacks Investment Research
SMCI Stock – Has a Scalable Business & NVIDIA’s Backup
NVIDIA Corporation (NVDA - Free Report) is taking advantage of the flourishing AI-chip markets, expected to witness a CAGR of 38.2% from 2023 to 2032, to $383.7 billion by 2032, per Allied Market Research.
Super Micro’s business is intertwined with NVIDIA since SMCI’s AI servers are needed to mount AI chips. Hence, the SMCI stock is expected to scale upward driven by the ever-expanding AI-chip market (read more: The Better AI Stock to Buy Now: NVDA or SMCI).
Super Micro has room to expand its business since it only accounts for 10% of the AI server market share, and is providing stiff competition to dominant players like Dell Technologies Inc. (DELL - Free Report) . The AI server market is estimated to witness a CAGR of more than 18% from 2024 to 2032, according to Global Market Insights.
SMCI Stock – Has a Very Strong ROE
Super Micro’s supremacy in the AI server market has helped the company generate profits proficiently (read more: 2 AI Stocks That Can Be the Next NVIDIA).
This is because the SMCI stock has a return on equity (ROE) of 34%, way more than the Computer- Storage Devices industry’s 6.1%. As a thumb rule, any reading more than 20% is perceived to be very strong.
Image Source: Zacks Investment Research
SMCI Stock – Is Trading at a Discount
Despite yesterday’s hiccup and severe volatility in recent months, the SMCI stock has been able to outperform the industry year to date (+56% vs +51.8%).
Image Source: Zacks Investment Research
Still, SMCI stock is less expensive compared to its peers, which has given the stock a competitive edge. This is because, per the price/earnings ratio, SMCI trades at 13.2X forward earnings. However, the industry’s forward earnings multiple is 17.9X.
Image Source: Zacks Investment Research
Strong Price Upside for SMCI Stock
Banking on the positives, prominent brokers have increased the average short-term price target of SMCI by almost 68.5% from the stock’s last closing price of $574.64. The highest price target is set at $1,500, an upside of 173.9%.
Image Source: Zacks Investment Research
SMCI stock, therefore, is worth investing in. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.