Super Micro Computer (SMCI -0.86%) is a complex investment. The company’s server products are in high demand due to artificial intelligence (AI), but it faces accusations of accounting malpractice and a Department of Justice (DOJ) investigation.
Currently, the negative factors outweigh the positives, leading to a 60% drop in Supermicro’s stock since its peak in March. Recently, it also underwent a 10-for-one stock split, which typically boosts stock prices instead of lowering them.
Risks for Supermicro
Supermicro’s market is saturated with competitors. However, they stand out with energy-efficient technology, which drives significant demand due to rising operational costs for servers. Despite this advantage, their gross margins have fallen because of supply chain issues with new liquid-cooled systems. Management expects improvements by fiscal 2025.
There’s a concern that as their products become more commoditized, profit margins may shrink further as competition intensifies.
Accounting Allegations and Government Scrutiny
In August, Hindenburg Research accused Supermicro of accounting malpractice, prompting a DOJ investigation. While the company denies these allegations, they delayed filing their end-of-year report with the SEC, raising eyebrows.
Investors are caught in a dilemma: with ongoing issues like low profit margins and a DOJ probe, Supermicro may seem risky. However, the company projects revenue growth of up to 101% year-over-year in fiscal 2025, suggesting it could be undervalued.
At only 14.2 times forward earnings, Supermicro could be one of the most affordable growth stocks available, especially compared to the S&P 500’s 23.7 times forward earnings.
I think there’s enough potential to consider investing, but I’ve limited my exposure to about 1% of my portfolio due to the risks. If you’re uncomfortable with fluctuations, there are safer AI stock options available.
However, if Supermicro addresses its challenges, there’s a strong chance for significant upside.
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