Artificial intelligence (AI) just might be the biggest investing theme of the year. Technology companies operating in this area drove gains in the S&P 500 in the first half, and many of these players continue to advance. Why are investors so interested in AI? Because of the technology’s potential to revolutionize everything from your daily routine to how a company operates. As a result, companies making or using AI could see their earnings soar.
One of the early winners is Super Micro Computer (SMCI 2.93%). This AI equipment maker has seen earnings take off since the start of the AI boom, and share performance has followed. Supermicro stock has soared 2,100% over the past five years, and in the first half of this year, it rose 188% — even beating AI market star Nvidia.
The Supermicro story, though, has included a few difficult chapters in recent weeks, weighing on investors’ appetite for the stock. But Wall Street sees this as a buying opportunity and expects the stock to surge in the coming 12 months. Should you take Wall Street’s advice or hold off on buying this AI player? Let’s find out.
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Products key to data-center operations
First, a bit of background on this AI player. Supermicro isn’t a new kid on the block. It’s been around for more than 30 years. The company sells servers, workstations, and other products integral to the operations of data centers. Prior to the AI boom, Supermicro progressively grew revenue and profit, but these metrics truly took off as demand from AI customers gained momentum.
SMCI Net Income (Annual) data by YCharts.
This year, Supermicro reached a key milestone: Revenue in one quarter surpassed what it generated in a whole year as recently as 2021. Customers have flocked to Supermicro thanks to its ability to quickly tailor its products to their needs and include the very latest chip innovations. The company is able to do this for two reasons: Most of its products contain similar parts, making them fast and easy to assemble; and Supermicro works hand in hand with all of the top chip designers so that it can immediately integrate their latest chips in its equipment.
On top of this, Supermicro may see a new burst of growth ahead as demand for direct liquid cooling (DLC) of data centers takes off. Supermicro predicts 25% to 30% of new data centers in the coming 12 months will include DLC and intends to dominate the market.
A short report and other troubles
All of this sounds great. So what’s gone wrong for Supermicro in recent weeks? In late August, Hindenburg Research released a short report, alleging troubles at the company, and this was followed by a Wall Street Journal (WSJ) article about a potential Justice Department probe into Supermicro. The company also delayed the filing of its 10-K annual report, a move that prompted investors to worry about Supermicro’s earnings.
Supermicro called statements in the short report “false or inaccurate.” In the same letter to customers, it said that though its 10-K report would be late, the company doesn’t expect any significant changes to earnings figures. As for the WSJ report, Supermicro declined to comment.
Supermicro stock slid 29% in the one-week period following the short report, but it’s since climbed more than 20% from its low on Sept. 6.
Today, the average Wall Street recommendation is a “buy,” and the average share-price forecast calls for a 60% increase over the coming 12 months. So, Wall Street clearly is optimistic about the company’s prospects.
Should you buy on the dip?
Now, let’s get back to our question. Should you follow Wall Street and buy this stock on the dip or wait on the sidelines? The answer depends on your comfort with risk. If you’re a cautious investor, now isn’t the time to buy Supermicro shares. Though the company has commented on the short report, we still don’t know whether Supermicro faces a Justice Department probe.
Of course, a probe isn’t necessarily a deal-breaker when it comes to investing. Many companies have faced government probes, and the probes haven’t hurt the long-term investing case. Still, cautious investors may want to wait for more clarity on the uncertainties weighing on Supermicro before diving in.
If you’re an aggressive investor, though, and can tolerate some risk, you might consider picking up a few shares of Supermicro at the current bargain level of 14 times forward-earnings estimates. After all, the facts we have today still support a fantastic long-term growth story, and early investors could potentially win big.
