Super Micro Computer stock (NASDAQ:SMCI) has experienced significant volatility this year. Super Micro Computer is a data center solutions provider that sells server systems, server motherboards, storage, networking solutions, management software, and installation and maintenance services. SMCI shares have increased nearly eightfold over the past two years, from about $6 per share in September 2022 to about $47 today, driven by strong demand for servers from AI data centers as well as a recent 1-for-1 stock split. But the stock saw a meaningful pullback earlier this year on concerns about gross margins, supply chain issues and a delayed 10-K filing following accusations of accounting irregularities by short-seller Hindenburg Research. So, is Super Micro stock a buy, hold or sell?

We discussed a number of results in our final analysis. On the one hand there is Potential for the stock to more than double to $1,000. On the other hand, we have presented a counter-case that outlines this. Super Micro shares could fall to around $200 per share.

Admirably, SMCI shares have outperformed the broader market in each of the last 3 years. Stock returns were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, Trefis High Quality PortfolioIt is significantly less volatile, with a collection of 30 stocks. And there is outperformed the S&P 500 every year in the same period.

Why? As a group, Genel Merkez Portföy shares provided better returns with less risk compared to the benchmark index; fewer roller coaster rides as seen Headquarters Portfolio performance measurements.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SMCI see a strong bounce?

Let’s start with the bad first

There are concerns about whether demand can continue. The underlying economics of the broader AI ecosystem remain in question at this point, and most AI customers are still losing money. Large language models are also expensive to build and train. We may be in an AI “FOMO phase” where companies feel compelled to invest in AI just because their competitors do. We may see capex cool down and impact growth as Super Micro’s end customers look for better returns. Additionally, most AI companies are currently in the compute-intensive training phase, and the demand for computing power and server equipment may decrease once they move into the less compute-intensive deployment phase. This could also hurt demand for Super Micro’s server systems, server motherboards, storage and networking solutions.

The corporate governance concerns raised by Hindenburg Research deserve close attention, but the full extent of the issue remains unclear. The short seller alleges that Super Micro may have improperly recognized revenue by underbooking sales and bypassing internal controls. Additionally, the company has been accused of having questionable relationships with related parties, particularly suppliers linked to the CEO’s family. Hindenburg also emphasized that executives involved in past scandals were rehired shortly after the company settled with the SEC. Although these issues are concerning, more information is needed to fully assess the situation.

Additionally, Super Micro’s margins are vulnerable. Although net margins improved from 6% in FY’22 to approximately 9% in FY’24, driven by higher economies of scale, declining sales and increased competition will reduce the company’s volumes and pricing power. , these can drop significantly. Moreover, SMCI has seen gross margins face some pressure in recent quarters as it sells a higher mix of liquid cooling systems that are expensive to produce, and this trend may continue. The server market is also highly commoditized. While Super Micro has some competitive advantages, given that its products are more customizable, the company’s lead in these areas is not insurmountable and competition could increase significantly.

good and great

While the first AI models deployed by the likes of OpenAI in 2022 were largely text-based, the models are becoming increasingly multi-modal; This means they work with speech, images, video and 3D content; This requires higher computing power and more GPU dispatches. . Moreover, unlike about a decade ago, when advances in computing power (especially processors) outpaced development software that could fully exploit these capabilities, in the age of artificial intelligence, the demand for computing power has increased rapidly due to the intense computational demands of machine learning. models. If computing requirements continue to grow, Super Micro may also see demand increase as the company’s infrastructure tools are required to support the expansion.

The change in US monetary policy could also give SMCI an extra boost. The Fed’s first 50 basis point cut in nearly four years brings the federal funds rate to 4.75%-5%, leaving room for further cuts. Low rates support growth sectors such as technology by increasing the present value of future earnings. Interest rate cuts are especially beneficial for SMCI. From where? Lower interest rates will lower financing costs for large data center builders and potentially increase capital spending in the field. Moreover, the economics of the AI ​​revolution remain complex, given the high costs of model training and inference. A decrease in interest rates may increase the financial feasibility of these investments. Check out our analysis of other trails You will profit from the Fed’s next move.

Although the server market is commoditized, Super Micro has some competitive advantages as its products are seen as more customizable and energy efficient than competitors. Super Micro’s customers are also increasingly choosing higher quality products. For example, the company estimates that costly liquid cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of the server racks it ships next year. The company is also steadily increasing its production capacity. For example, it is building a new facility in Malaysia that can produce more than 5,000 racks of server kits each month. This gives the company the ability to grow revenues over the long term.

So what should you do?

Reply: Add SMCI to your portfolio so you can dream of 5x returns in the long run while also being prepared to take a 50% loss at any time along the journey. Yes, be willing to endure short-term pain (the price you pay) to be rewarded in the long term. Although this seems simple in theory, it is never easy to experience in practice.

While investors expect the US economy to make a soft landing, how bad could things get if a new recession occurs? Our control panel How Far Can Stocks Fall During a Market Crash? Captures how key stocks have performed over the last six years and beyond the market is crashing.

Invest with: Trefis Portfolios That Beat the Market

see all Trefis Price Predictions