Is Super Micro Computer the Stock That Makes Millionaires?

Super Micro Computer (NASDAQ:SMCI) 2024 has been an interesting year. It started the year as one of the hottest stocks, tripling in price in less than three months. It then began a slow decline after investors took profits and Supermicro (as the company is often called) reported a poor earnings report. To make matters worse, Hindenburg Research, a prominent short-selling firm, reported that Supermicro was involved in accounting fraud, prompting a Department of Justice (DOJ) investigation into the allegations.

It’s been quite a roller coaster ride for Supermicro investors, and as a result, the stock is down significantly from its all-time high. So, could this be a million dollar investment idea? After all, Supermicro’s business is booming.

Demand for Supermicro products has skyrocketed

Super Micro Computer’s growth is driven by incredible demand for artificial intelligence (AI) computing power. Supermicro manufactures server components and also sells complete server systems. The company’s products stand out from the competition because of their superior cooling technology: the most efficient servers are liquid-cooled, eliminating the need to house these servers in large rooms to cool them with expensive air conditioning.

According to Supermicro, this offers energy savings of up to 40% and space savings of up to 80% because racks can be placed closer together because airflow is not as critical. This combination allows customers to fit more servers in a room, which is a key selling point.

Massive demand for Supermicro products quickly accelerated the growth of Supermicro’s business. In the fourth quarter of fiscal 2024 (ended June 30), Supermicro’s revenue grew 143% year over year to $5.3 billion. The company also gave strong guidance for fiscal 2025: management expects revenue of $26 to $30 billion, an increase of 74 % to 101%.

But management has a broader vision. The company believes it can grow its business to $50 billion in annual revenue. While that may seem like an ambitious goal, the forecast was $20 billion at the end of last year’s fourth quarter, and Supermicro’s 2025 forecast has already exceeded that level.

If that was the only information investors had, Supermicro would likely still be one of the hottest stocks on the market, but there’s more to the story.

Supermicro has had its share of problems

One of the big red flags in Supermicro’s results is its declining gross margins. That value has fallen to a ten-year low despite rising earnings. This is never a good sign.

SMCI Gross Profit Data (Quarterly) from YCharts

Management says its gross margin should grow through fiscal 2025, driven by a more profitable product mix, improved production efficiencies in its liquid-cooled product line (plants in Malaysia and Taiwan are still ramping up production) and new product introductions. This will be key for investors as Supermicro’s earnings could rise sharply if its gross margin improves over the course of the year.

However, given allegations of accounting irregularities, some investors are concerned that they can’t trust anything management says. Prominent short-selling firm Hindenburg Research pointed to Supermicro’s past mistakes as the company paid a $17.5 million fine for accounting errors made in 2018. To make matters worse, Supermicro also delayed filing its 10-K this year. because it assessed “the design and operating effectiveness of its internal control over financial reporting.”

This is another potential weakness, and as the DOJ looks into it, the potential scandal could cause investors to stay away from Supermicro. I wouldn’t blame anyone because there is a lot of risk in stocks. But there is a big reward if management’s forecasts come true and the Justice Department’s investigation turns up nothing wrong.

Supermicro may be one of the cheapest stocks tied to the AI ​​investment trend, trading at just 15 times expected earnings.

SMCI PE Ratio data from YCharts

If he makes it through these troubled waters unscathed, it’s not unreasonable to assume that he could fetch a premium equal to that of S&P 500 Index (SNPINDEX: ^GSPC)which trades at an average price of 23.8 times forward earnings.

Supermicro stock comes with a lot of risk, but there’s also potential for upside. So, will this stock make you a millionaire? Most likely not. I’m talking about stocks doubling or tripling in the next few years, so unless you have a huge pile of money to invest in them, it won’t happen.

However, if you are interested in a small risk-adjusted position (Supermicro is about 1% of my portfolio), it has the potential to enhance your long-term returns. So stocks can speed up your path to becoming a millionaire.

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Keithen Drury holds a position at Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.