Sometimes, when a stock falls on hard times, investors sell and forget about it. But in the case of AI server specialist Super Micro Computer(NASDAQ: SMCI), these naysayers could be missing out on a big resurgence.
Most investors came to know Super Micro as one of the biggest artificial intelligence winners, at least through the first half of last year. That's before short-selling firm Hindenburg released an August 2024 report on the company accusing it of accounting manipulation, followed by Super Micro's auditor Ernst & Young resigning from auditing the company's books in October. On top of all of this, the AI trade appears to have come under further pressure, as investors fear the Trump administration's tariff policies could spur a recession and further limit AI sales to foreign countries.
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Despite all of this, Super Micro has actually refuted a lot of the allegations against it, and it's also very well positioned to capture the next wave of AI investment. Trading at a bargain basement valuation, here's how the stock could be a multibagger over the next year.
Tightening up the books
First, the best news for Super Micro is that its new auditor appears to have cleared its books as accurate, despite the resignation of former auditor Ernst & Young last October.
After Ernst & Young resigned, Super Micro hired new auditor BDO late last year. And while BDO did deliver an adverse opinion on Super Micro's accounting controls and procedures, it also verified Super Micro's revenue and profit for 2024, 2023, and 2022 as accurate.
It's likely that Ernst & Young got nervous regarding Super Micro's substandard back office controls, and decided to quit rather than remain as auditor. However, quitting instead of reverifying financials, as BDO did, seems like a step too far.
Looking back on it, the abrupt resignation may have been due to Ernst & Young's having been embroiled in various scandals in recent years. In 2022, Ernst & Young had to pay $100 million fine after it was revealed hundreds of its auditors cheated on their CPA exams. And in 2023, the European wing of of the company had to pay a 500,000 euro fine after its client Wirecard went bankrupt following years of accounting fraud while Ernst & Young was that company's auditor. Therefore, the auditing giant may have been scared off by Hindenburg's accusations and Super Micro's abnormal back office operations.
In any case, the good news for shareholders is that Super Micro's hypergrowth over the past few years was confirmed by a major accounting firm. Super Micro is also currently upgrading its IT and accounting systems and procedures, while also looking for a new chief financial officer, which was one of the recommendations its board committee gave on the matter.
On March 31, the company took another positive step with the appointment of Scott Angel to Super Micro's board of directors. Angel was a 37-year executive at Big 4 auditing firm Deloitte & Touche, where he specialized in risk and compliance issues, especially for technology firms.
So, having Angel on the board, along with hiring a new and experienced CFO should go a long way toward cleaning up Super Micro's procedures going forward, which should put its accounting controversy to rest once and for all.
No AI slowdown in sight, despite concerns
Besides the accounting issues, Super Micro has more recently been dinged over fears of an AI infrastructure slowdown. But unless we experience a very severe global recession, it doesn't appear as though AI infrastructure investment will stop.
Several hyperscale companies recently restated their spending plans for 2025, even after the April 2 "Liberation Day" tariff reveal threw the global economy into a high amount of uncertainty. Moreover, with the prize of AI supremacy being so big, well-funded large-cap companies are unlikely to arrest their investments significantly.
In its recent February report, technology research firm IDC sees AI servers growing at a 42% compound rate through 2028. That number seems to align with Super Micro CEO Charles Liang's recent forecast for 40% annual revenue growth in the medium term.
While there are definitely economic headwinds to contend with this year, remember that successful AI deployment has the potential to greatly lower costs to corporations while also enhancing revenue opportunities. In lean times, it's possible major enterprises will lean even more heavily on AI technology.
Gross margin should rebound
While growth is great, a final overarching concern among investors has been the lower gross margin Super Micro has seen over the past year. Wall Street analysts have taken this as a sign of competition creeping in on Super Micro's first-to-market competitive advantage.
To be sure, the AI server opportunity is large, and many competitors, including Dell(NYSE: DELL), are also experiencing lower gross margins on AI servers relative to traditional ones. Over the past two years, Super Micro saw its gross margin dip from above 18% at the end of 2022 to just 11.8% last quarter.
But it's also possible a rebound for gross margin may be in the cards. As management explained on its recent earnings call with analysts, Super Micro is often first-to-market with new innovations, as it was with Nvidia's (NASDAQ: NVDA) Hopper chip, which launched at the end of 2022. That first-to-market advantage with Hopper servers was why margins rallied above 18% at that point.
However, we are now over two years past the launch of Hopper. That means in addition to customers perhaps slowing purchases of servers in recent quarters as they wait for Nvidia's new Blackwell chip, the competition has also developed Hopper solutions, which put pressure on Super Micro's gross margin.
But Blackwell is just now beginning to ramp this quarter, and the introduction of a new technology could provide an opportunity for Super Micro to regain some lost gross margin. And with Nvidia now moving to a one-year cadence of new chip architectures, with its Rubin chip slated to come out in 2026, that more rapid pace of new technology introduction should benefit Super Micro and its first-to-market advantages.
Of note, Super Micro's management has never altered its 14% to 17% long-term gross margin range. That was true when margins were above that range in 2022, and also when they were below that range more recently. Clearly, the market believes lower gross margins are here to stay. But if Super Micro increases gross margins back into its long-term range with the ramp of Blackwell servers, that could change the narrative.
The lowest valuation you'll find for an AI stock
A final reason Super Micro could more than double over the next year is its bargain valuation. Super Micro's stock trades at just 13.7 times trailing earnings and eight times earnings estimates for fiscal 2026. That's far below the average multiple in the market, let alone a company experiencing AI-fueled growth.
What's interesting about those 2026 estimates is that the average analyst estimate for revenue and EPS is only $33.5 billion and $3.65, respectively, with the most optimistic analyst anticipating $38.5 billion in revenue and $5 in EPS.
However, Charles Liang noted on the prior earnings call he expects "at least" $40 billion in 2026 revenue. Should the company achieve that, with gross margins finding their way back to just 15%, in the lower part of Super Micro's long-term guidance range, that could yield a gross profit of $6 billion.
Operating expenses appear to be on track for about $1.2 billion in fiscal 2025. If those increased to $1.6 billion in 2026, Super Micro would make about $4.4 billion in operating profit, which would translates to roughly $3.7 billion in 2026 net profit at the current tax rate Super Micro is paying, or about $5.65 per share.
Even if one puts a meager 14 times multiple on those earnings -- and there's a good case Super Micro could see multiple expansion if it beats analyst targets -- that would bring its share price to $80 per share, more than 150% higher from where the stock is today.
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Billy Duberstein and/or his clients have positions in Super Micro Computer. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
