Super Micro Computer stock (NASDAQ: SMCI) has experienced considerable volatility this year, although a potential boost may be on the horizon with the company’s upcoming 10-for-1 stock split. SMCI stock rose nearly eightfold over the past two years—from about $60 per share in September 2022 to levels of about $460 today, led by strong demand for servers from AI data centers. However, the stock saw a meaningful pullback earlier this year amid concerns over gross margins, supply chain issues, and a delayed 10-K filing following short-seller Hindenburg Research’s accusations of accounting irregularities. Now as the stock prepares for split-adjusted trading starting from October 1, there could be renewed interest in Super Micro shares.
SMCI stock has generated better returns than the broader market in each of the last 3 years. Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. So how will the upcoming split impact SMCI stock?
While splits don’t alter the fundamental outlook for a company, they often trigger a run-up in stock prices post-announcement. We saw this during Nvidia’s recent split and Tesla’s first stock split in 2020. Additionally, stocks tend to outperform post-split for two reasons: they enhance accessibility for smaller investors, driving up demand and trading volumes. In Super Micro’s case, the price of an individual share of stock would fall to a level of about $46 from $460 currently, and this could be a more palatable sum for smaller retail investors. Moreover, splits signal that management is confident about the company’s prospects, indicating that growth may remain strong. There is ample reason for optimism in SMCI stock. Can Super Micro stock fare better than AI bellwether Nvidia?
SMCI is projected to grow its revenue by close to 90% in FY’25 (the current fiscal year) to levels of about $28 billion, per consensus estimates, as data center-related spending remains strong, with tech companies boosting their AI and accelerated computing capacity. AI models are increasingly multimodal, moving from just text processing to working with speech, images, video, and 3D calling for higher computing power and consequently higher demand for servers and computing capacity. Although the server market is commoditized, Super Micro does have some competitive advantages, given that its products are seen as being more customizable and more energy efficient than rivals. Super Micro’s customers are also likely to opt for more premium products. For example, the company estimates that costly liquid-cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of server racks it ships next year. The company is also steadily boosting its production capacity. For example, it is getting ready to roll out a new facility in Malaysia that can produce over 5,000 racks of server kits every month. Although the company has seen its gross margins face some pressure in recent quarters as it sells a higher mix of liquid-cooling systems, which are proving expensive to produce, things could pick up as it eventually builds out a more efficient supply chain for its servers.
Super Micro stock trades at just about 21x trailing earnings and 13.5x forward earnings at the current price level. Is this a reasonable multiple? We believe it is. While we note that the ongoing compliance-related matters present an overhang over the stock, there is potential for the stock to rise over 2x to $1,000. On the other hand, we present a counter case that outlines how Super Micro stock could decline to levels of about $200 per share.
Super Micro: A Stock Split With A Twist?
Super Micro Computer is less than a week away from its 10-for-1 stock split. The split is expected to take effect on October 1, 2024. However, the stock has already experienced some volatility in the weeks leading up to the split. One key reason for this is investor uncertainty about the impact of the split, and also the impact of the recent short report issued by Hindenburg Research. Since the split was announced in early August, Super Micro shares have fallen nearly 26%. This suggests that investors may be taking a wait-and-see approach to the stock, with some uncertainty about the impact of the split on the company's future prospects.
What To Expect From The Split?
During a stock split, a company will issue more shares, thereby causing the stock price to drop. The important caveat here is the outstanding share count and stock price should have an inverse relationship, therefore leaving the overall valuation of the company the same as before the split.
So, the stock split itself is not expected to have a significant impact on the company's valuation. However, it could lead to increased trading activity, as more investors are able to afford the stock at a lower price. This could also lead to greater investor interest in the company, especially among retail investors.
The Potential Risks
There are a few potential risks that investors should be aware of before investing in Super Micro Computer. The first is the short report issued by Hindenburg Research. The report alleged that Super Micro had engaged in accounting fraud, which could lead to regulatory scrutiny and potential fines. If these allegations prove to be true, it could have a negative impact on the company's future prospects.
The second risk is the company's recent earnings performance. Super Micro has reported declining gross margins in recent quarters, which has raised concerns about the company's profitability. While management has attributed this to supply chain issues and the rollout of new products, investors will be watching closely to see if these issues are resolved.
Finally, the broader market environment could also affect Super Micro's stock price. The global economy is facing a number of headwinds, including inflation, rising interest rates, and the war in Ukraine. These factors could lead to a decline in demand for servers, which could hurt Super Micro's business.
Super Micro's Stock Split: What to Consider?
The upcoming stock split is a positive development for Super Micro Computer, as it could lead to increased trading activity and greater investor interest in the company. However, investors should be aware of the potential risks before investing in the stock. The short report from Hindenburg Research, the company's recent earnings performance, and the broader market environment all could have a negative impact on Super Micro's future prospects.
The Final Word
Whether or not you should invest in Super Micro Computer before or after the split is a personal decision that depends on your individual risk tolerance and investment goals. If you're a long-term investor with a high risk tolerance, you may be willing to take a chance on the stock, despite the risks involved. However, if you're looking for a safer investment, you may want to wait to see how the market reacts to the split before making a decision. Only time will tell how the stock split will impact Super Micro Computer's future prospects. But one thing is certain: the company's future is tied to the growth of the AI market, which is expected to continue to grow rapidly in the years to come. So, if you're bullish on the future of AI, Super Micro Computer could be a stock worth considering.
