This Stock-Split Stock Just Ran Into Trouble. Here's Why It's Still a Buy.
Super Micro Computer (NASDAQ: SMCI) posted a fantastic first half of the year. Thanks to demand from artificial intelligence (AI) customers, in just one quarter, the company delivered sales that surpassed what it used to generate in a full year as recently as 2021. The S&P 500 and Nasdaq-100 even welcomed this 30-year-old tech company to join. And Supermicro's share price reflected all this good news, climbing 188% to outperform market darling Nvidia.
In fact, the stock had reached such high levels — peaking at more than $1,100 early in the year — that in August, the company announced a stock split planned for later this month. This sort of operation involves the issuance of additional shares to current holders to bring down the per-share price, opening up the investment opportunity to a broader range of investors.
But in recent weeks, the story has lost some of its sparkle. A short report by Hindenburg Research alleging troubles at Supermicro hit the stock badly — it's dropped 16% since the report's late-August release. Separately, Supermicro delayed filing its 10-K annual report, another element that's weighed on the shares. Despite these challenges, Supermicro still makes a great buy right now. Let's find out why.
Hindenburg's short position
First, let's consider the bad news. In its report, Hindenburg alleged "glaring accounting red flags," "evidence of undisclosed related party transactions," and other potential issues. But it's important to keep one thing in mind. Hindenburg holds a short position in Supermicro, meaning it will benefit if the stock declines. This bias makes it difficult to rely on Hindenburg as a source of information about the company.
Another point to keep in mind is that Supermicro addressed the report, saying it "contains false or inaccurate statements." So, I wouldn't base a decision on whether to buy or sell Supermicro on the Hindenburg report. Instead, it's better to consider what we know, such as the company's path so far, details from recent earnings reports, and market potential.
I mentioned that Supermicro has been around for quite some time, but it's only over the past few years that its earnings have truly taken off. That's because AI customers are busy building out their data centers, and they're rushing to Supermicro for its workstations, servers, and other products.
Supermicro's strategy
Why Supermicro? The company is able to quickly build products to suit a customer's needs, including the very latest technology. This is because Supermicro uses building block technology, meaning its products contain a lot of common parts. Supermicro also works closely with top chip designers to immediately integrate their new releases into its products.
This has helped the equipment maker reach record revenue in recent quarters. On top of this, Supermicro may be at the start of a new high-growth opportunity thanks to its ability to solve a big problem with today's AI data centers: the accumulation of heat. Supermicro makes direct liquid cooling (DLC) elements to handle this and sees demand here set to take off. The company predicts 25% to 30% of new data centers will use this technology in the coming 12 months and Supermicro will dominate the market.
Considering the AI market is forecast to reach more than $1 trillion by the end of the decade, it's clear that heat could become a problem — and Supermicro may see a huge wave of growth from its expertise in DLC.
Finally, Supermicro recently said that though it's delaying its 10-K filing, it doesn't expect any major changes to its fourth-quarter or fiscal-year results. That's another element that should ease our minds.
So, Supermicro offers us a solid track record, a strategy that sets it apart, and potential for growth ahead. In addition, due to the recent headwinds, the stock has fallen into dirt cheap territory at only about 13x forward earnings estimates. And that's why now is a great time for long-term investors to consider scooping up shares of this company that may be heading for a whole new wave of growth.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
This Stock-Split Stock Just Ran Into Trouble. Here's Why It's Still a Buy. was originally published by The Motley Fool