Super Micro Computer (NASDAQ: SMCI) shares are imploding due to a knee-jerk reaction to weaker-than-expected margin news. However, the takeaways from the earnings report suggest that margin weakness is fleeting and that this dip is buyable. More to the point, the company’s 10-for-1 forward stock split is a signal for investors to load up on this value-building AI machine.
Stocks that split are well-known to outperform the S&P 500 (NYSEARCA: SPY), usually by 2-to-1 over the long term, and there is a robust outlook to support this market. As tepid as the margin was, guidance was better and likely cautious, given the company’s dominating position in today’s tech market. Coincidentally, the 10-for-1 split is slated to take effect on 10/1.
What exactly does Super Micro Computer do? It makes data center infrastructure, including servers built on NVIDIA (NASDAQ: NVDA) and AMD (NASDAQ: AMD) AI accelerators. Because it is the leading provider of server solutions and components for data center infrastructure, investors can assume that demand for NVIDIA and AMD chips equals demand for its products. That is clearly seen in the results.
Super Micro Computer Has Mixed Quarter: So What?
Super Micro Computer had a mixed quarter, only relative to the analysts' inflated expectations. Analysts projected about 100% EPS growth compared to the 80% reported. Still, the miss was offset by ramping production and improving cash flow, which has the business set up to generate significant value for investors.
Other highlights from the report include record demand for AI-related infrastructure products centered on next-gen technology, including DLC liquid cooling. DLC liquid cooling uses a closed-circuit system to establish a cooling loop to cut down on the massive amounts of heat generated by AI; this is important because the heat was a debilitating factor for large-scale data centers before AI, increasing the cost of operations and is now compounded by it.
The cash flow, balance sheet, and guidance are why investors should look past the Q4 earnings miss. Cash flow jumped by triple digits, allowing for a 4x cash build and 4x inventory build, and is compounded by a doubling of receivables. Current and total assets are up 4x, offset to a degree by increased liability, but not by much. Equity is up 175% and likely to continue growing at a triple-digit pace in 2025. Among the causes of the bottom line weakness are expenses related to R&D and expansion plans, which will aid the company in scaling profitably and widening its margin.
Regarding the guidance, the company is forecasting another year of triple-digit gains that are more significant than the consensus forecast. The company’s guide for Q1 is looking for revenue of $6.5 billion compared to the $5.5 billion analyst average target. The earnings outlook is equally strong, $8.27 versus $7.68, with strength expected to build sequentially. The full-year outlook includes an expectation for revenue nearly double the average analyst forecast, and it may be cautious. No reason to flee this market now.
Analysts Forecast 50% Upside for Super Micro Computer
Some analysts are lowering their price targets for SMCI stock because of the margin miss. However, the takeaway from the data is bullish because coverage is rising, nearly tripling the number of analysts over the last year, and the consensus target implies a 50% upside. The lowest fresh target is $700, sufficient for a 15% upside, and the revisions include at least one reiterated target above $1000. The price action may experience volatility while the market adjusts to the news. However, the uptrend in this stock is still intact, likely to be reinvigorated by stock-split-inspired value-seeking bottom-fishers.
Following the release, the price action in SMCI was bearish, shaving more than 10% off the stock’s price. If the market doesn’t begin to rebound immediately, it could fall to the $450 range to align with the uptrend line before buyers enter the market. The risk is that SMCI stock will fall below trend and continue to move lower, but this is not expected due to the robust outlook for growth and improving shareholder value.
