Super Micro Computer Has Dropped 18%. Will It Soar After its Stock Split?
Earlier this year, Super Micro Computer (NASDAQ: SMCI) proved itself as one of the powerhouses in today's economy. Thanks to demand from artificial intelligence (AI) customers for its equipment, the company delivered triple-digit revenue growth. Stock performance followed, with shares posting a first-half gain of 188%, even beating the gain of market darling Nvidia. And Supermicro scored invitations to join the S&P 500 and the Nasdaq 100, another sign of its earnings strength and market leadership.
All of this sounds fantastic, but in recent weeks Supermicro has faced some headwinds that have translated into declines in the share price. The stock has lost about 18% since a short report in late August that alleged troubles at the company. On top of this, investors worried as Supermicro delayed its 10-K annual report.
Now, moving forward, Supermicro has a big event right around the corner. The company will complete a 10-for-1 stock split at the end of the month, and the shares will start trading at their new split-adjusted price on Oct. 1. Will this once high-flying stock recover from recent woes and soar after the stock split? Let's find out.
What lies ahead for Supermicro
First, let's talk about Supermicro's path so far and what may lie ahead. The company isn't a new producer of workstations, servers, and other equipment. Supermicro actually has been around for more than 30 years, but growth only started taking off in recent times as the AI boom accelerated. AI customers have flocked to Supermicro for equipment as they build and expand their data centers.
And Supermicro has been ready to serve them -- and with all of the latest technology from the AI chip market because this tech powerhouse works hand-in-hand with the biggest chip designers. So when Nvidia, for example, releases a new chip, it's immediately available in Supermicro's equipment. This has helped Supermicro grow five times faster than the industry average over the past year.
It's also helped Supermicro's earnings take off. In the most recent quarter, revenue soared more than 140%, and profit climbed in the double digits. And this may be just the beginning as Supermicro gears up to address a new growing market: cooling solutions to tackle the heat problem in AI data centers. Supermicro predicts as much as 30% of new data centers will opt for direct liquid cooling within the coming 12 months and says it will dominate this market.
At the same time, Supermicro is readying to open its Malaysia facility, one that will help it make gains in volume and lower costs in the coming years.
As for the short report and Supermicro's delayed annual report, I don't see these issues as ones that change the bright long-term story: Supermicro called statements in the short report "false or inaccurate" and regarding its annual report says it doesn't expect any significant changes to earnings.
The Supermicro stock split
Now, let's consider the upcoming stock split. These operations lower the price of each individual share, making the stock more accessible for a broader range of investors. But splits don't change anything fundamental about a company -- so valuation and the market value of the company remain the same, for example.
This means a stock split, in and of itself, isn't a reason to buy a stock -- so the shares probably won't surge when they open at the split-adjusted price. Still, a split generally is a positive move for a company because, as mentioned, it makes it easier for more people to buy a particular stock. In this case, considering the current price of Supermicro and the ratio of the split, you'll be able to pick up a share for about $45 instead of more than $450. Progressively, this could attract more investors to the stock -- but only if they like the company's earnings track record and long-term prospects.
Now, let's get back to our question. Will the stock soar after the split? I wouldn't expect that to happen overnight, since stock splits themselves don't act as catalysts for performance. But considering Supermicro's earnings strength so far and its potential to dominate in the DLC market, this top AI player has plenty of room to run over the long term.
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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.
Super Micro Computer Has Dropped 18%. Will It Soar After its Stock Split? was originally published by The Motley Fool