Super Micro Computer (SMCI) is a relatively well-known technology stock that has retreated from its highs after facing a series of negative developments. Most recently due to a reported Department of Justice (DOJ) probe, the stock has suffered from allegations of accounting violations and decreasing margins. However, I’m bullish on SMCI due to long-term growth tailwinds in the sector and the company’s expertise in liquid cooling technology positions.
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Super Micro Reportedly Facing DOJ Probe
For those of you who haven’t followed Super Micro Computer’s incredible rise and dramatic fall, this Santa Clara-based company is a leading server manufacturer and a major supplier to companies in the artificial intelligence (AI) sector, including Nvidia (NVDA). The stock is up 2030% over five years, but is down 56.9% over six months. I take a bullish contrarian view at this juncture.
The company has recently found itself at the center of controversy and federal scrutiny, with the U.S. DOJ reportedly launching an investigation into Super Micro’s accounting practices. The probe, still in its early stages, stems from allegations made by a former employee, Bob Luong, who filed a whistleblower lawsuit in April 2024. Luong accused the company of accounting violations, including transactions involving the CEO’s family and rehiring employees previously dismissed for similar misconduct.
The stock had already come under selling pressure after short-seller Hindenburg Research released a report in August 2024 alleging “glaring accounting flags” and undisclosed related party transactions. The company firmly denied these claims, but the accusations, combined with the ongoing whistleblower lawsuit have attracted federal attention.
Likely in response to these developments, Super Micro delayed filing its 10-K annual report for fiscal year 2024, citing the need for additional time to assess its internal financial controls. It’s been a perfect storm that has brought this high-flying stock back to earth.
Class Action Versus Super Micro
Compounding this, a class action lawsuit has been filed against Super Micro and certain executives, alleging violations of federal securities laws. The lawsuit, filed on behalf of investors who purchased Super Micro securities between February 2, 2021, and September 25, 2024, claims that the company provided misleading information about its financial results and internal controls.
Recent Margin Challenges
While these issues have made headlines, analysts are also concerned about the company’s margins, which have come under pressure. Super Micro’s gross profit margin has fallen from around 17-18% in 2023 to just 11.23% in the quarter ending June 30, 2024. Not only has the gross margin declined, but the net profit margin has also fallen from about 10% in Q3 to 6.64% in Q4.
These falling margins have largely been attributed to higher component costs, increased labor expenses, and rising operational costs. While executives have acknowledged this issue and outlined plans to return to their traditional gross margin target range of 14% to 17%, these pressures may not go away in the near term.
Long-Term Trends Remain Solid
Despite these challenges, I believe Super Micro’s long-term prospects remain strong. The company’s expertise and investment in liquid cooling technology puts it at the forefront of a critical trend in the AI server market. This is particularly important because as AI workloads become increasingly complex and power-intensive, the demand for efficient cooling solutions is expected to grow significantly. Super Micro’s early mover advantage in this space could translate into significant market share gains.
The company’s partnership with NVIDIA has been crucial in expanding its AI solutions portfolio, particularly in edge computing environments. This collaboration allows Super Micro to offer high-performance AI and training solutions for advanced workloads in remote edge locations, such as public spaces, retail stores, and industrial infrastructure.
This is a huge and growing sector that SMCI is linked to. According to Blackstone, forecasts suggest that $1 trillion will be spent on data centers in the U.S. over the next five years. At 12.3x forward earnings and with a price-to-earnings-to-growth (PEG) ratio of 0.27, SMCI stock appears undervalued given its growth expectations.
Is SMCI Stock a Buy, According to Analysts?
On TipRanks, SMCI comes in as a Hold based on three Buys, ten Holds, and one Sell ratings assigned by analysts in the past three months. The average SMCI stock price target is $64.36, implying a about 40% upside potential.
Analyst Nehal Chokshi from Northland Securities has the highest SMCI price target on the street, at $130. Chokshi has a pretty good record on SMCI with a 65% success rate and an average return of 59.05%
The Bottom Line on Super Micro Stock
Super Micro Computer stock trades at a considerable discount to its average share price target and has a very attractive P/E and PEG ratio. SMCI’s appeal is undoubtedly linked to strong growth tailwinds in the data center segment and the company’s pioneering water-cooling technology. Despite near-term concerns, which of course mean there could be significant downside remaining, I still think this company will succeed over the long run.
