A High-Risk, High-Reward Stock in the AI Space
Super Micro Computer (NASDAQ: SMCI) has had a rollercoaster year, with its stock price tripling in just three months before plummeting due to a bad earnings report and allegations of accounting fraud. Despite these challenges, the company’s business is booming, driven by the insatiable demand for artificial intelligence (AI) computing power.
A Leader in Server Technology
Supermicro is a leading manufacturer of server components and complete server systems. Its products stand out from the competition due to their superior cooling technology, which provides up to 40% energy savings and 80% space savings. This allows customers to pack more servers into a room, making it a key selling point.
Rapid Growth and Ambitious Projections
In Q4 FY 2024, Supermicro’s revenue rose 143% year over year to $5.3 billion. The company expects to generate between $26 billion and $30 billion in revenue in FY 2025, representing 74% to 101% growth. Management believes it can grow the business to $50 billion in annual revenue, a lofty goal that seems achievable given the company’s rapid growth.
Red Flags and Risks
However, there are several red flags that investors should be aware of. Supermicro’s gross margin has declined to a decade-long low, which is a concern despite rising revenues. Additionally, the company has faced allegations of accounting malpractice, including a $17.5 million fine for accounting errors in 2018. The Department of Justice is currently investigating these claims, which could lead to further volatility in the stock.
A Cheap Stock with Upside Potential
Despite these risks, Supermicro’s stock is trading at a mere 15 times forward earnings estimates, making it one of the cheapest stocks associated with the AI investment trend. If the company can navigate these challenges and achieve its growth projections, it’s possible that the stock could fetch a premium equal to that of the S&P 500.
A Small Position Could Boost Returns
While Supermicro’s stock is unlikely to make you a millionaire overnight, taking a small position adjusted for risk could boost your long-term returns. With its rapid growth and ambitious projections, Supermicro is a stock worth considering for investors looking to capitalize on the AI trend. However, it’s essential to be aware of the risks and volatility associated with this stock.
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