High-Flying Server Maker Faces Turbulence: Can It Regain Altitude?
Super Micro Computer, a leading server manufacturer, has experienced a dramatic fall from grace over the past six months. After reaching an all-time high of $1,188.07 in March 2024, its stock has plummeted to around $420, wiping out nearly two-thirds of its value. The company’s market capitalization has shrunk from $67 billion to $25 billion, leaving investors who rode its previous rally reeling.
Supermicro’s woes can be attributed to concerns about its declining gross margin, short-seller allegations, delayed filing of its annual report, and potential probes by the U.S. Department of Justice. Despite these challenges, the company remains a dominant player in the high-performance liquid-cooled server market, particularly in the booming artificial intelligence (AI) sector.
With a compound annual growth rate (CAGR) of 45% from fiscal 2020 to fiscal 2024, Supermicro’s revenue has surged, driven primarily by its dedicated AI servers. The company now generates over half of its revenue from this segment, and analysts expect it to increase its market share from 10% to 17% within the next three years.
However, Supermicro faces intense competition from industry giants Dell Technologies and Hewlett Packard Enterprise, which are ramping up their production of similar high-end servers powered by Nvidia’s GPUs. Additionally, the company’s adjusted gross margin has contracted from 15.9% in fiscal 2020 to 14.2% in fiscal 2024, raising concerns about its ability to maintain profitability.
Despite these headwinds, Wall Street remains largely bullish on Supermicro, with only one of 20 analysts rating it as a sell. Analysts expect the company’s revenue to grow at a CAGR of 46% from fiscal 2024 to fiscal 2026, with EPS increasing at a CAGR of 39%.
In a best-case scenario, Supermicro could grow its EPS at a robust CAGR of 25% from fiscal 2026 to fiscal 2030, potentially rallying its stock by roughly 465% and boosting its market capitalization to nearly $134 billion by the end of the decade. However, this would still fall short of making it a trillion-dollar stock.
Investors should focus on whether Supermicro can overcome its current challenges, stabilize its gross margin, and counter short-seller and regulatory headwinds. If it fails to do so, its stock could underperform its industry peers over the next six years.
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