The US stock market had a tough time last month, with the S&P 500 slipping 3%. But one embattled tech stock is bucking the trend.
Super Micro Computer (NASDQ: SMCI) is a server and data centre hardware company that designs, manufactures, and sells high-performance computing solutions. The company specialises in AI, cloud computing, and enterprise IT infrastructure.
Shares of the stock gained over 50% in February, making it the most successful stock on the index. The wider picture, however, tells a less impressive story — the stock is down 61% over the past year.
So does the recent growth suggest a recovery is on the cards — or is it a sucker’s rally?
Accounting and governance issues
Supermicro suffered significant losses in the second half of 2024 after facing allegations of accounting irregularities. This ultimately led to the resignation of its auditor, Ernst & Young. These issues raised concerns about the company’s financial integrity, contributing to the drop in its stock price.
In early February, shareholders anticipated better-than-expected results for the full year 2024. This helped lead to rapid growth in the first three weeks of the month.
But as the day got closer, fears spread that it might fail to meet the submission deadline. In the end, it successfully filed its delayed financial reports just before Nasdaq’s deadline last Tuesday (25 February 2025). Subsequently, it averted a potential delisting and restored investor confidence, which led to a brief price jump.
The results and the small recovery are promising, but is it enough to save the stock?
Risks to consider
The previous accounting issues and auditor resignation have cast a shadow over the company’s governance practices, which may continue to affect investor confidence. Any more delays – or missed expectations – could hurt the already sensitive share price.
What’s more, the server hardware and data warehousing market is highly competitive. Major players like Dell Technologies and Nvidia present tough competition. Supermicro certainly has its place, but there’s no guarantee it can maintain its market share.
Well-positioned with strong financials
Supermicro holds a dominant position in the server and data centre hardware industry, an in-demand sector with strong growth potential. The increasing demand for AI and cloud computing infrastructure doesn’t look likely to drop off any time soon.
As such, analysts anticipate revenue to increase over 100% in the next two years, nearing $33.2bn by 2026. Earnings per share (EPS) are expected to follow suit, more than doubling from $2.21 to $4.52 by 2027.
Share price forecasts are somewhat more subdued, averaging a moderate 14.2% gain in the coming 12 months. Yet, from a valuation perspective, the stock looks cheap.
Based on future cash flow estimates, it could be undervalued by as much as 86%. Plus, it has a forward price-to-earnings (P/E) ratio of 14, well below the industry average of 21.8.
The company’s balance sheet looks good, with $6.24bn in equity and $1.91bn in debt. That gives it a debt-to-equity (D/E) ratio of only 0.3.
As a shareholder, the recent results and improved auditing practices are encouraging. But I’m not 100% sold on a full recovery just yet, so I may hold off a bit before buying more shares.
This post was originally published on Motley Fool
