Super Micro Computer’s (NASDAQ:SMCI) fiscal fourth quarter results, reported on Aug. 8, show that the demand for its products continue to grow tremendously amid the AI boom. Moreover, the company’s guidance indicate that its sales are poised to soar explosively, easily beating the Street’s prior expectations, over the longer term.
The Street pushed down Super Micro stock because the company’s profit margins came in below analysts’ average outlook. But the margin miss was at least partly due to benign reasons. What’s more, history suggests that, in the long term, overall profits ultimately matter much more than profit margins in determining stocks’ value. Also importantly, the valuation of Super Micro Computer stock is quite low relative to its growth.
Given all of these points, I recommend that long-term investors buy Super Micro Computer stock.
Growing Tremendously Due to the AI Boom
In Super Micro’s fiscal Q4 that ended in June, net sales soared 143% versus the same period a year earlier to $5.3 billion, while net income jumped to $5.51 per share, compared with $3.43 per share in the same quarter a year earlier.
Further, the company predicted its revenue during its fiscal year which ends in June 2025 would balloon to $26 billion to $30 billion. In the fiscal year that ended on June 30, 2024, Super Micro generated revenue of $14.9 billion. So the firm expects its sales to double or nearly double during its current fiscal year. Additionally, the company’s sales guidance for its current fiscal year was well above analysts’ mean estimate of $14.9 billion.
CEO Charles Liang confirmed in a statement that the demand for the firm’s “AI infrastructures” was the key factor behind its huge growth.
Margin Concerns Are Overdone
Super Micro did report lower-than-expected Q4 earnings per share of $6.25, versus analysts’ mean estimate of $7.81, and it provided slightly lower-than-expected Q1 EPS guidance. The EPS misses are being driven by Super Micro’s lower-than-expected profit margins. In Q4, the firm’s gross margin was 11.3%, versus Bank of America’s prior estimate of 13.6%.
In a previous article, I noted that the margin shortfall, according to the bank, “was primarily due to the firm’s expenses related to its efforts to launch new liquid cooling products and its increased sales to hyperscalers, whose purchases are less profitable for Super Micro than those of other customers. “
If those are indeed the reasons for the margin shortfall, worries about the company are the quintessential overdone concerns that sometimes cause those with little long-term vision on the Street to pull down stocks with great futures. After all, the firm’s new liquid cooling products will eventually be launched. And given the huge extent of the AI boom, Super Micro will almost certainly be able to sell its products to many firms other than the hyperscalers.
Others, however, have suggested that increased competition is actually largely to blame for the margin miss.
Even if increased competition is a major issue, Super Micro’s bottom line is still soaring. Moreover, analysts expect that trend to continue. Indeed, on average, they predict that its EPS next year will climb to $43.26 versus $33.84 this year.
And as I’ll show in my next section, history suggests that profits, not profit margins, determine stock prices over the longer term.
Profits Versus Profit Margins
In the short term, the Street often wrings its hands about low profit margins. But history suggests that net income is called “the bottom line” for a reason. In other words, overall profits, not profit margins, ultimately move stock prices in the long term.
Oil companies, for example, have notoriously low profit margins. Indeed, Exxon Mobil (NYSE:XOM) has a fairly low operating margin of 13.35%. But over the years, the stock has continuously risen. Similarly, General Motors’ (NYSE:GM) low profit margins haven’t stopped its shares from roughly doubling over the past 12 years. And given the explosive growth of AI, Super Micro’s growth opportunities are so much greater than those of either Exxon or GM.
Valuation and the Bottom Line
Super Micro Computer stock is now changing hands at a forward price-to-earnings ratio of just 14 times. Given the firm’s huge growth and its high leverage to the AI supercycle, that’s an extremely attractive valuation. Long-term investors should take advantage of this tremendous opportunity by buying the shares.
On the date of publication, Larry Ramer held a long position in SMCI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor held a LONG position in XOM.