It’s been a topsy-turvy year for Super Micro Computer (NASDAQ: SMCI). Once seen as the next big artificial intelligence (AI) stock, it has come crashing down to reality in recent months due to concerns about the reliability of its numbers and accounting controls.
However, after hitting a low of $17.25 on Nov. 15 on concerns that it could get delisted from the Nasdaq exchange, the stock has rallied heavily, and recently traded at about $30. With a new auditor in place and a plan to file its financials (which are late) by February, investors appear to be much more at ease with the stock these days.
But while you might be tempted to buy into the rally, there’s still significant risk here, and multiple reasons the stock could be due for a big pullback in 2025.
When it comes to AI stocks, the name of the game is growth. Super Micro has experienced significant demand for its servers and storage products as companies race to develop AI models.
Since the company is still transitioning to a new auditor, it hasn’t posted a full set of quarterly numbers since August. In November, however, the company did release preliminary results for the first quarter of fiscal 2025 (ended Sept. 30). What was a bit concerning is that Super Micro projects net sales to be within a range of $5.9 billion to $6 billion. That’s considerably lower than its previous estimate, which projected sales of between $6 billion and $7 billion. These aren’t final numbers, but it looks like a significant miss, and it raises questions about whether the business is seeing a slowdown in demand.
Even if Super Micro does release its financials in a timely fashion, that doesn’t mean that the results will necessarily be great or what investors will want to see. While $6 billion in sales would still represent an incredible increase of 183% year over year, the problem is that Super Micro’s gross margins still remain incredibly low.
To alleviate concerns about accounting controls and procedures, it seems inevitable that Super Micro may need to hire more staff and spend money on implementing additional protocols to help maintain the accuracy and integrity of its financials.
That additional overhead could mean that Super Micro’s profit margins will become even narrower. The tighter those margins are, the less benefit the company gets from any incremental dollar of revenue. In its preliminary numbers for Q1, Super Micro’s gross margin was just 13.3%. While that’s technically an improvement from the 11.2% it reported a quarter earlier, that’s still dreadfully low — and gross margin comes before overhead and other indirect expenses. The company’s actual profit margin will be even narrower.
