Super Micro Computer is currently trading just around the $32 mark. Its one-year returns stand at a paltry 10%, nothing to write home about. Yet the stock has been in the news throughout the year, for both good and bad reasons. It quadrupled in no time before sliding down to reasonable valuations. Then the Hindenburg report came out and the company has been battling financial issues since.
Super Micro Computer, Inc. specializes in designing high-performance servers, server management software, and storage systems, aimed to work in data centers, cloud computing, and artificial intelligence.
Its SuperBlade servers are designed for high-density environments like data centers, its BigTwin server combines high performance with energy efficiency and is ideal for cloud applications, and its Ultra servers are optimized for AI and big data applications.
All of these servers are known for ensuring minimal downtime and operational continuity, as well as superior thermal management and energy efficiency, contributing to a reduced total cost of ownership.
Roughly 64% of the company’s revenue comes from selling OEM appliances and large data center solutions. The U.S. markets represent 67% of total revenue for the company, while Asia and Europe generate approximately 14% each.
The end markets of the company are enterprise data centers, cloud computing services, artificial intelligence applications, and telecommunication services. Among its top clients, we find NVIDIA, Intel, Advanced Micro Devices, Amazon Web Services, IBM, Alibaba, Oracle, and Microsoft.
The stock has now fallen to levels it traded at for most of 2023. One may therefore be inclined to think that the worst is past us and that the current levels provide good support. However, the underlying business continues to worry investors, making it unlikely that new investors would like to buy the stock even at current prices.
Super Micro delayed filing its annual report after the short seller report claiming there were financial irregularities in the company came out. There has been minimal visibility into the company’s finances since. This is worsened by reports of the company pursuing a Private Investment in Public Equity (PIPE) deal. A PIPE deal is when private investors buy equity in a company at a discount to its current market price. If this materializes, it will confirm the financial crisis, as no sound company would sell its shares at a discount otherwise.
For existing shareholders, this would mean a shareholding dilution, something that is scaring off new investors. At just 14 times forward earnings, the company’s valuation is attractive. We believe the valuation can become even more attractive once the company announces its annual report in February and lays out a plan to get out of the crisis. Until that time, there is hardly any good reason for investors to take a position in this stock.
SMCI is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held SMCI at the end of the third quarter which was 47 in the previous quarter. While we acknowledge the potential of SMCI as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as SMCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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