After Giving Investors Great News, Is Super Micro Computer Stock Headed Back to $50?
Key Points
Supermicro released preliminary numbers for the fourth quarter, which gave the stock a boost.
The stock is trading well below the high of more than $50 it reached earlier this year.
The company's troubled past, however, may give investors doubts.
Super Micro Computer (NASDAQ: SMCI), which also goes by Supermicro, has been rallying recently after disclosing encouraging preliminary earnings results. But despite the strong initial boost, the stock isn't likely to take off and return to the highs of more than $50 it reached earlier this year.
Although Supermicro's business may be showing signs of progress, tech investors should continue to tread carefully, as it's by no means a slam-dunk buy despite recent developments. Here's why.
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Supermicro's preliminary numbers were mixed
On July 21, Supermicro released preliminary fourth-quarter numbers. While the full results won't come out until Aug. 11, it did give investors some key numbers beforehand:
- Revenue will be at the low end of its guidance of $11 billion and $12.5 billion,
- Gross margin will be within 15% to 17% (higher than its previous forecast of around 8%), and
- The backlog has grown to record levels, and new orders exceeded $60 billion in Q4.
The big number that has investors bullish is the gross margin, which has typically been fairly low for Supermicro in the past and was just under 10% in the most recent quarter. However, even at 15% to 17%, that's still not terribly high. Meanwhile, the company's revenue is tracking slightly below expectations. So while the margin may be higher, if revenue isn't as strong, the overall impact on the bottom line may not be significant.
The stock looks cheap, but it warrants a discount
Supermicro's stock may look incredibly undervalued today. It's trading at just 16 times its trailing earnings, and that falls to a forward earnings multiple of nine, based on analyst earnings estimates for the year ahead. Investors may be inclined to believe it has tremendous upside, particularly with its opportunities in artificial intelligence (AI).
However, given Supermicro's tumultuous past, including a previous auditor resigning over concerns about policies and controls, and multiple people involved with the business, including its co-founder, charged with smuggling products to China, the stock deserves to trade at a discount. Not only are its margins light and its growth heavily dependent on demand from the AI build-out, but there are also significant concerns about its governance. A discount is warranted, and it offers investors a bit of a buffer.
Supermicro likely needs a major catalyst to convince investors it's worth buying, even at a seemingly modest valuation, and I don't think improving its margins in a single quarter will be enough.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.