Super Micro Computer Stock: Buy Before Earnings?

Super Micro Computer: A Hot AI Stock Facing Challenges

Super Micro Computer emerged as one of the hottest AI stocks in early 2024, but its stock price has been on a downward trend since peaking in March. With the company scheduled to report quarterly financial results on Tuesday, August 6th after market close, investors are wondering whether they should buy Super Micro stock before the earnings announcement.

The Rise and Fall of Super Micro Computer Stock

In January 2024, Super Micro Computer stock was recommended as a buy due to strong earnings prospects, growing revenue, and the early stages of AI market development. However, the stock price experienced a rapid and unexpected increase in the following two months, leading to a soaring valuation.

By March 6th, 2024, the stock was trading at a forward price-to-earnings (P/E) ratio of over 38, a significant increase from its historical valuation of around 10. At this point, investors were advised to take profits and sell Super Micro Computer stock, as the valuation appeared to be stretched and getting ahead of itself.

This recommendation proved to be accurate, as the stock price has fallen from over $1,100 per share in March to $698 per share currently. Investors who followed this advice would have avoided substantial losses.

Recent Financial Performance

Despite the stock price decline, Super Micro Computer reported remarkable growth in its latest quarter:

• Revenue increased to $3.85 billion
• Earnings per share jumped to $6.65
• Revenue growth exceeded 200%
• Earnings per share growth surpassed 300%

The company also raised its fiscal year 2024 revenue outlook from $14.5 billion to $14.9 billion at the midpoint. Super Micro Computer has consistently raised expectations as results continue to surpass management's forecasts.

Fourth Quarter 2024 Expectations

For the fourth quarter of 2024, ending June 30th, Super Micro Computer expects:

• Sales of $5.3 billion at the midpoint
• GAAP income per share range of $7.20 to $8.50

This projected revenue of $5.3 billion would represent another significant increase from the $3.85 billion reported in the third quarter.

Reasons for Stock Price Decline

Despite the company's strong performance, there are two main reasons for the stock price decline:

1. Share Dilution

Super Micro Computer has been selling shares to raise capital, increasing the diluted shares outstanding from 56,233 to 61,063 year-over-year. This dilution can negatively impact existing shareholders.

2. Negative Cash Flow from Operations

Despite soaring revenue and earnings per share, Super Micro Computer's net cash flow provided by operating activities has turned significantly negative. In the nine months ending March 31st, the company reported negative $1.844 billion in cash flow from operations, compared to positive $672 million in the same period the previous year.

This negative cash flow is not necessarily alarming for a rapidly growing company like Super Micro Computer. The gap between inventory spending and customer payments can create temporary cash flow issues. However, it does require the company to raise additional capital to fund its operations.

Valuation Concerns

The stock's valuation has decreased significantly from its peak. It now trades at a forward P/E of 16.5, down from over 38. While this is a more reasonable valuation, it still represents a premium compared to the company's historical trading range.

Investors should consider that Super Micro Computer operates with low profit margins (around 10% operating profit margin), which typically results in lower valuations for hardware-focused businesses.

Should You Buy Super Micro Computer Stock Before Earnings?

While the current valuation is more attractive than it was in March, it may be prudent to wait until after the earnings announcement before making a decision to buy Super Micro Computer stock. Here's why:

1. The stock is still trading at a premium compared to its historical valuation.
2. The company's profit margins are not expected to improve significantly in the near future.
3. Management is focusing on gaining market share, which could potentially lead to lower profit margins.

Factors to Consider in the Upcoming Earnings Report

When Super Micro Computer releases its earnings report, investors should pay attention to the following factors:

1. Revenue growth: Will the company meet or exceed its projected $5.3 billion in sales?
2. Earnings per share: How does the actual EPS compare to the projected range of $7.20 to $8.50?
3. Cash flow from operations: Has the company made progress in improving its cash flow situation?
4. Guidance: What is the company's outlook for the upcoming quarters and fiscal year?
5. Market share gains: Any updates on the company's efforts to expand its market presence?
6. AI-related developments: New products or partnerships in the artificial intelligence space.
7. Profit margins: Any changes or trends in the company's operating margins.
8. Capital expenditures: Investments in manufacturing capacity or research and development.
9. Customer diversification: Efforts to reduce reliance on a small number of large customers.
10. Supply chain updates: Any improvements or challenges in sourcing components.

Potential Scenarios After Earnings

Depending on the earnings report and subsequent market reaction, there are several potential scenarios that could unfold:

1. Positive surprise: If Super Micro Computer significantly beats expectations and provides strong guidance, the stock could see a sharp increase. In this case, investors might consider buying on strength if the long-term outlook remains positive.

2. In-line results: If the company meets expectations but doesn't provide any major surprises, the stock might experience limited movement. This could present a buying opportunity if the valuation remains reasonable.

3. Negative surprise: If the company misses expectations or provides weak guidance, the stock could see further declines. While this might seem like a buying opportunity, it's important to reassess the company's long-term prospects before making a decision.

4. Mixed results: The company might beat on some metrics but miss on others. In this case, it's crucial to analyze the overall picture and how it affects the long-term investment thesis.

Long-term Outlook for Super Micro Computer

Despite the recent challenges, Super Micro Computer's long-term outlook remains tied to the growth of the AI industry. The company's ability to provide high-performance, energy-efficient server and storage solutions positions it well to benefit from the ongoing AI boom.

However, investors should keep in mind the following factors:

1. Competition: The AI hardware market is becoming increasingly competitive, with both established players and new entrants vying for market share.

2. Technological changes: Rapid advancements in AI technology could require continuous innovation and investment from Super Micro Computer.

3. Economic factors: A potential economic slowdown could impact enterprise spending on AI infrastructure.

4. Regulatory environment: Increased regulation of AI technologies could affect demand for AI hardware.

5. Customer concentration: Super Micro Computer's reliance on a small number of large customers could pose risks if any of these relationships were to change.

Conclusion: Wait for Earnings Before Making a Decision

While Super Micro Computer's stock has become more attractively valued since its peak in March, it's advisable for investors to wait until after the earnings report before making a decision to buy. The upcoming financial results and management's commentary will provide crucial information about the company's current position and future prospects.

If the company reports solid earnings and maintains its strong outlook, and if the stock continues to trade at a reasonable valuation, it's possible that a buy recommendation could be warranted. However, it's important to carefully analyze the full earnings report and consider the broader market context before making any investment decisions.

Remember that investing in individual stocks, especially in the volatile tech sector, carries risks. It's always wise to diversify your portfolio and consider your personal financial goals and risk tolerance when making investment choices.

As the AI industry continues to evolve, Super Micro Computer's performance will likely remain closely tied to developments in this space. Investors should stay informed about both company-specific news and broader trends in the AI market to make well-informed decisions about their investments in Super Micro Computer stock.

Article created from: https://youtu.be/Ca9G4y8I83U