Should Investors Buy Super Micro Stock on the Dip? | SMCI Stock Analysis

Summary

In this video, the analyst revisits Super Micro Computer's stock amid a challenging market environment, marked by increasing tariffs and a selloff. Despite past financial reporting issues, the company's business, driven by booming AI data center demand, is thriving. However, risks such as negative cash flow, management transparency concerns, and tariff headwinds are present. The analyst adjusts future free cash flow expectations lower but concludes the stock is still undervalued, with a strong intrinsic value compared to its current price. Despite the risks, Super Micro Computer is considered a buy for risk-tolerant investors.

Takeaways

• 😀 The stock market selloff has continued, with investors adjusting to new announcements from President Donald Trump and increasing tariffs on U.S. trading partners.
• 😀 Super Micro Computer's stock has attracted attention due to its rapid revenue growth, which has been fueled by the booming AI sector, including data centers supporting large language models like ChatGPT.
• 😀 Despite its growth, Super Micro Computer has faced significant issues with its financial reporting, including delays and lack of transparency, which have raised investor concerns.
• 😀 The company’s revenue jumped to $21 billion in the last 12 months, up from less than $5 billion in 2021, but tariffs may slow the growth rate in the future.
• 😀 Negative cash flow from operations was noted as a concern, though it is somewhat typical for hardware companies that rely on favorable supplier terms to cover up-front costs.
• 😀 The company’s return on invested capital is solid at 21%, though it has decreased from previous highs of over 30%, which is still acceptable given its growth trajectory.
• 😀 Super Micro Computer’s weighted average cost of capital (WACC) is 11.31%, which is lower than its return on invested capital, indicating solid returns relative to capital costs.
• 😀 Free cash flow projections have been revised downward, with the 2025 expectations now showing negative cash flow of $480 million, down from previously positive projections.
• 😀 Despite the adjustments, Super Micro Computer’s intrinsic value per share is $66.46, more than twice its current market price of $31.54, suggesting that the stock is undervalued.
• 😀 The stock is currently trading at a forward PE of 8.5, which is in line with pre-boom levels, indicating that the valuation has returned to more reasonable levels after a period of overhyped growth.
• 😀 While Super Micro Computer is undervalued according to valuation models, it carries significant risk due to both business risks (such as tariffs) and financial reporting concerns, making it suitable only for risk-tolerant investors.

Q & A

What is the main reason for the stock market selloff discussed in the video?

The main reason for the stock market selloff is the announcements from President Donald Trump and the increasing tariffs placed on the United States' trading partners, leading investors worldwide to adjust their strategies.

Why has Super Micro Computer's stock become so attractive to investors?

Super Micro Computer's stock has attracted investors due to the significant surge in the company's revenue, driven by its involvement in installing AI-optimized data centers, a rapidly growing sector receiving heavy investments from major tech companies like Microsoft, Amazon, and Alphabet.

What challenges has Super Micro Computer faced in terms of its financial reporting?

Super Micro Computer faced a scandal when it failed to report its financial statements on time, leading to the resignation of its auditor due to transparency issues. This created doubts about the company's financial reporting and the management's reliability.

What impact did the negative cash flow from operations have on the company's financial health?

Negative cash flow from operations was a concern for Super Micro Computer, but the company explained that it was due to paying suppliers upfront while waiting for payments from larger clients like Amazon and Microsoft. This situation is not uncommon for hardware suppliers, though it added a layer of risk to the financial outlook.

How did the company’s return on invested capital (ROIC) change over the years?

The company’s return on invested capital (ROIC) peaked at over 30% during its revenue boom but has since decreased to around 21%. Although this is still considered solid, the downward trend in ROIC is concerning as it reflects the impacts of growth slowing down.

What changes were made to the company's free cash flow projections?

The free cash flow projections for Super Micro Computer were adjusted downward due to the headwinds posed by tariffs and operational challenges. The 2025 forecast was changed from positive to negative, with negative free cash flow expected for the next three years.

How did the analyst adjust the risk-free rate in the valuation model?

The risk-free rate was adjusted from over 4.5% to 4%, in line with current market conditions, as the 10-year government bond yield had decreased from its earlier levels.

What does the intrinsic value calculation suggest about the stock's current market price?

The intrinsic value per share for Super Micro Computer was calculated to be $66.46, which is more than twice the current market price of $31.54, suggesting that the stock is undervalued.

What is the forward price-to-earnings (P/E) ratio for Super Micro Computer, and how does it compare to its previous valuation?

The forward P/E ratio for Super Micro Computer is 8.5, which is similar to the stock’s valuation before the AI-driven revenue surge, indicating that the stock is trading at a valuation level similar to its pre-boom state.

Is Super Micro Computer a good investment right now, according to the analyst?

Super Micro Computer is considered a good investment for very risk-tolerant investors. While the stock is undervalued, there are significant risks, including financial reporting issues, the impact of tariffs, and business challenges, making it a riskier investment than usual.