Is the Investment in Supermicro Shares Worthwhile in 2025?
With a staggering 71% drop from its peak of $119 in March, Super Micro Computer (SMCI -5.22%) is currently trading at a significant discount. This decline is due to allegations about the company's accounting practices and other challenges, causing its shares to take a hit.
Despite the negative press, Supermicro's business is thriving, fueled by the increasing demand for artificial intelligence (AI). The question here is, will this be enough to revive the stock? Let's delve deeper to understand the company's potential performance in 2025 and beyond.
2024: A Tumultuous Year for Supermicro
Supermicro serves as a prime example of how swiftly a Wall Street favorite can lose its luster. The turmoil began on August 27, when Hindenburg Research, a short-selling organization, released a report accusing the hardware manufacturer of accounting irregularities, self-dealing, and evasion of sanctions related to the Russian invasion of Ukraine.
The following day, Supermicro announced delayed filing of its fourth-quarter report, citing the need to evaluate its internal control effectiveness. Within no time, its auditor, Ernst & Young, resigned. These events heightened suspicions and opened up the possibility of de-listing from the Nasdaq, which could affect liquidity and diminish institutional investors' interest in the shares.
While Supermicro's stock price has plummeted quite significantly lately, there's a glimmer of hope. The company managed to secure a new auditor (BDO USA). In addition, on December 6, it received an extension from the Nasdaq, allowing until February 25 to file its delayed annual reports. And the business seems to be doing well despite the crisis.
Continued Operational Momentum
Supermicro's breakthrough may have occurred in November, when an independent special committee released unaudited earnings data. The company anticipates fiscal first-quarter sales between $5.9 billion and $6 billion. Though below its initial guidance, it still represents an impressive 180% growth compared to the previous year.
Supermicro's growth supersedes that of AI leaders like Nvidia and AMD, which reported 94% and 17% top-line growth in their most recent quarters, respectively. Supermicro's continuous surge is likely to persist due to its role as a middleman in the AI hardware market, utilizing GPUs made by Nvidia and other chipmakers to create ready-to-use computer servers for data centers.
With the impending launch of next-generation AI GPUs like Nvidia's Blackwell or AMD's MI350, the demand for Supermicro's servers could increase, as their technical advantages make them essential for competitive companies. For instance, AMD's MI350 chip is predicted to achieve 35 times better performance in inference compared to its predecessor, the MI300.
An Extremely Depressed Valuation
In December, Supermicro's independent special committee claimed to have found no traces of managerial misconduct, and they expect no modification of previously reported financial data. Pending investigation results, investors should maintain caution. However, if the company's projected earnings are taken at face value, its shares are shockingly affordable.
With a forward price-to-earnings (P/E) ratio of just 9.9, the shares are selling for less than half the S&P 500's (^GSPC -1.11%) average estimate of 24. This is an astonishingly low P/E ratio for a company growing at triple-digit rates.
While investors may wait for further information before stepping in, Supermicro shares appear to be a valuable investment consideration going into 2025 and beyond.
Considering the ongoing challenges facing Supermicro, investors might be hesitant to put their money into the stock. However, with a forward P/E ratio of 9.9, which is significantly lower than the S&P 500's average of 24, the company's shares present an attractive opportunity for those willing to invest in finance and potentially reap high returns in the future. Moreover, diligent investors looking for growth in the technology sector may find Supermicro's focus on investing in advanced AI hardware highly appealing.
