Super Micro Computer (SMCI +5.13%) shares surged nearly 25% on March 5 following its fiscal Q3 earnings report, when the company reported a surprising recovery in its gross margins. With the move, the stock is up about 18% year to date, as of this writing.
Let’s dig into the company’s results to see whether or not it’s too late to buy the stock.
Image source: The Motley Fool.
Supermicro managed some margin recovery
Supermicro is arguably one of the most controversial stocks on the market. The company has been involved in several scandals over the years involving its accounting practices, and earlier this year the U.S. Justice Department indicted three of its employees, including one of its co-founders, for an elaborate scheme of illegally smuggling high-tech components into China, violating the Export Control Reform Act.
At the same time, the company, which designs and assembles servers and rack solutions for data centers, has struggled with severe gross margin pressure for the past few years. This started in its June 2024 quarter when its gross margin sank to 11.2% from 17%, and it went down to 6.3% in fiscal Q2. However, Supermicro surprised investors this past quarter when its gross margins rebounded to 9.9%.
The company credited its gross margin improvement to reduced tariffs and customer mix, while noting it incurred high expedite charges in the December quarter that did not repeat. Management said it expects to feel pressure from supply constraints, but not to the extent it did in the prior six months.
Supermicro’s revenue, meanwhile, more than doubled year over year to $10.2 billion, while adjusted EPS soared from $0.31 to $0.84. Analysts were looking for an EPS of $0.62 of revenue of $12.3 billion. The company said supply shortages were behind its revenue shortfall, but that it expected to capture this revenue in later quarters.
Looking ahead, management projected that Supermicro’s fiscal fourth-quarter revenue would be between $11 billion and $12.5 billion, with adjusted EPS of $0.65 to $0.79. It projected gross margins to be between 8.2% and 8.4% in the quarter. It also amended its full-year revenue target from an outlook of at least $40 billion to a range of $38.9 billion to $40.4 billion.
Today’s Change
(5.13%) $1.73
Current Price
$35.34
Key Data Points
Market Cap
$21B
Day’s Range
$32.31 – $35.64
52wk Range
$19.48 – $62.36
Volume
2.2M
Avg Vol
37M
Gross Margin
8.39%
Is it too late to buy Supermicro’s stock?
It’s not totally surprising that investors remain intrigued by Supermicro. The company is seeing huge revenue growth stemming from the artificial intelligence (AI) infrastructure build-out, while the stock looks cheap, trading at a forward P/E of under 10.5 times fiscal 2027 analyst earnings estimates.
However, this company has had multiple scandals over the past several years and operates as a low-margin middleman. With data center component shortages and companies like Nvidia and AMD now offering their own preassembled full-scale rack solutions for specific AI tasks, it’s easy to see how the company’s margins will stay compressed.
As such, I would not buy the stock and think there are many better AI stocks to own.
