Super Micro Computer (NASDAQ:SMCI) has been one of the Street’s biggest success stories over the past year. The stock had been on one almighty AI-fueled run until entering a correction period after hitting its mid-March peaks.
That correction further accelerated earlier this week after the server and storage systems specialist delivered its fiscal third quarter results with shares tumbling by 14% in the subsequent session.
Given the nature of the results, that beating might seem a bit harsh. Revenue increased by a huge 200.8% year-over-year to $3.85 billion, yet just falling shy of the consensus estimate by $50 million. There was a conclusive beat on the bottom-line with adj. EPS of $6.65 beating the Street’s call by $1.08. The company benefited from a $0.69 advantage due to a lower tax rate, yet even excluding this factor, the figure still exceeded the consensus.
And moving forward, the company beat expectations for FQ4, guiding for revenue between $5.1-5.5 billion and EPS of $7.62- 8.42, both respectively much better than the analysts’ forecast of $4.7 billion and $6.97.
Modest sales miss aside, that all sounds rather peachy, so what were investors up in arms about? One metric that might have rankled could be that of gross margins, which fell from 17.6% a year-ago to 15.5%.
Looking ahead, Bank of America analyst Ruplu Bhattacharya says the guide for F4Q suggests the GM will be “meaningfully lower” sequentially (he reckons 13.6% or -200bps QoQ). This is “driven partly by competitive pressure and SMCI’s focus on gaining share, and partly by new components and some inefficiency as manufacturing of liquid cooled racks ramps.”
Cash burn for the quarter was also excessive (Operating Cash flow of -$1.5 billion and FCF of -$1.6 billion), although Bhattacharya notes that a big part of that was down to increased inventory, which the analyst considers “transitory.”
However, with these elements accounted for, Bhattacharya says his “bullish thesis remains intact given (1) SMCI is guiding well ahead of consensus for the June quarter, (2) on track to produce 2000+ direct to chip (DTC) liquid cooled racks per month by end of June quarter, which we see as a competitive advantage, (3) upside from the GB200 solutions to materialize in FY25 with higher ASP per system, (4) ability to capture demand from more chip vendors beyond Nvidia (Intel, AMD etc.), (5) remains a beneficiary of strong demand from Tier-2 CSPs and Enterprise, and (6) yet to benefit from sovereign AI demand.”
All in, Bhattacharya considers Super Micro a “pure play AI server vendor,” maintaining a Buy rating on the shares, although his price target is lowered from $1280 to $1090. Still, the revised figure represents 12-month returns of ~43%. (To watch Bhattacharya’s track record, click here)
Looking at the consensus breakdown, based on a mix of 7 Buys and 4 Holds, the analysts’ view is that SMCI stock is a Moderate Buy. There are plenty of gains projected here; the forecast calls for one-year returns of 48%, considering the average target clocks in at $1,132 and change. (See SMCI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
