Why Super Micro's stock is falling despite an upbeat growth outlook

By Emily Bary

One analyst's price target implies 60% further downside, in part due to margin concerns, as AI competition heats up

Super Micro Computer Inc. beat estimates with its revenue forecast for the current quarter as the company expects to continue capitalizing on artificial-intelligence spending.

So why were shares down 13% in Wednesday morning trading? It was more than just a case of high expectations for a stock that had been up about 700% over the past year prior to the report.

For one, the company's AI-focused offerings have lower margins, which is a concern for Super Micro (SMCI) over time, according to Susquehanna analyst Mehdi Hosseini. While Super Micro beat operating-margin and gross-margin expectations for the latest quarter, that was because the company saw a shortfall in revenue from AI sales, Hosseini said.

See also: Everything to know about Super Micro earnings

"Memory and storage cost continues to increase alongside [Super Micro's] need to aggressively discount to prevent share loss and acquire components, all of which are expected to continue to pressure [gross margins], while [operating expense] is increasing due to the increase in SMCI's manufacturing footprint," he added.

Hosseini has a negative rating on Super Micro shares, and while he lifted his price target on the stock to $285 from $200, that's still dramatically below current levels, implying about 60% downside from here. Super Micro's stock now trades near $755.

Super Micro's earnings highlighted a "dichotomy," according to Wedbush analyst Matt Bryson.

"The expected dip in margins in turn necessarily caters to concerns about how competition might weigh on SMCI's ability to translate AI related server growth into profit, both in the current quarter and moving forward," he wrote.

Bryson doubts that Super Micro's sales momentum will slow in the coming quarters, especially as Nvidia Corp. (NVDA) prepares to roll out its Blackwell line. Super Micro is known for being able to "productize" servers around new chips more quickly than its rivals, he said.

Opinion: Nvidia is chip sector's only hope after AMD and Super Micro disappoint

"But, at the same time we also continue to see the server market as competitive, and we struggle to pick out longer-term differentiators in product that would allow [Super Micro] to sustain a historically unprecedented share of AI server sales or hold margins with competitors pushing to gain share, particularly with [Nvidia's] leadership position allowing it to drive system design and specifications," Bryson continued.

He raised his price target on the shares to $800 from $530 but kept a neutral rating.

But others were more upbeat, including Rosenblatt's Hans Mosesmann, who called Super Micro the "Switzerland of AI."

"Management's expected compute growth rate is 3-5 times higher than the industry average," he wrote. "This is attributed to liquid cooling, sustainable gains in non-traditional hyperscale players and support not only from Nvidia but also from AMD and Intel CPU/accelerated solutions," he wrote.

Super Micro's revenue outlook of $5.3 billion came in well ahead of the $4.9 billion consensus view, he noted, despite supply constraints.

Mosesmann has a buy rating and $1,300 target price on Super Micro shares.

Read: AMD boosts its outlook for AI revenue, but stock still falls

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-01-24 1002ET

Copyright (c) 2024 Dow Jones & Company, Inc.