With shares down nearly 40% over the last 30 days alone, Super Micro Computer’s (NASDAQ: SMCI) rocket-ship rally is imploding. Shares now trade at a level unseen since late January, undoing almost seven months of gains in the blink of an eye. The company is reeling after weaker-than-expected profitability. Let’s explore what the next year could have in store.
Super Micro Computer’s lackluster earnings
A great company doesn’t always make a good investment because its valuation may price in unrealistic future expectations. This was one of the challenges Supermicro faced in its fourth-quarter earnings.
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Net sales increased by 144% year over year to $5.3 billion, driven by soaring demand for the company’s AI infrastructure. However, analysts were disappointed by the company’s adjusted earnings per share (EPS), which came in at $6.25 compared to expectations of $8.07. While Supermicro’s business is booming, profitability is under pressure because of lower gross margins, which fell from 17% to 11% year over year.
A somewhat shallow economic moat
Supermicro is known for turning Nvidia’s (and other chipmakers’) graphics processing units (GPUs) into ready-to-use computer servers. This niche has allowed it to piggyback off the soaring demand for AI chips as more data center clients race to build up their capacity.
However, Supermicro’s “middleman” business model is quite vulnerable. For starters, the company relies on hugely expensive chip supplies from its partners. And it isn’t well differentiated from other server makers like Dell Technologies or Hewlett Packard Enterprise, which operate a similar strategy. This competition could make it harder for Supermicro to pass costs to consumers or pad its margins by raising prices.
This is a very different situation from Supermicro’s partner, Nvidia, which managed to increase its gross margin from 76% to 78.4% in its fiscal first quarter because it has locked clients into using its products through popular software solutions like CUDA (optimized for Nvidia hardware) and a relentless update cycle, which…
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