Artificial Intelligence Stock Darling Loses Steam

Public information reveals that Super Micro Computer develops and supplies end-to-end green computing solutions for global enterprise IT, data centers, cloud computing, high-performance computing, and embedded systems. The company's products include a comprehensive range of rack-mounted systems, workstations, blade servers, storage, graphics processors, systems, networking equipment, and complete rack solutions.

The company's previously released financial report shows that it achieved revenue of $5.308 billion in the second quarter, a year-on-year increase of 142.95%, roughly in line with the market expectation of $5.3 billion; non-GAAP diluted earnings per share increased by 78.06% year-on-year to $6.25, below the market expectation of $8.07.

Advertisement

As of the end of June 2024, for the fiscal year 2024, Super Micro Computer's annual revenue was $14.943 billion, a year-on-year increase of 109.77%, and non-GAAP diluted earnings per share increased by 87.04% year-on-year to $22.09.

Management stated that the revenue growth was mainly driven by strong demand for the new generation of air-cooled and direct liquid-cooled (DLC) rack-scale AI GPU platforms, which accounted for more than 70% of the revenue from the enterprise and cloud service provider markets, and demand remains strong.

Although the company's revenue continues to grow, its profitability has declined. In the second quarter, Super Micro Computer's gross margin decreased from 17.01% in the same period of the previous year to 11.23%; excluding the impact of stock-based compensation, the non-GAAP gross margin also decreased from 17.06% in the same period of the previous year to 11.29%.

Management explained that the decline in gross margin was mainly due to differences in product and customer mix, as the company is now focused on securing strategic new designs at competitive prices, and the initial costs increased due to the production ramp-up of new DLC AI GPU clusters. In the future, the company will introduce innovative platforms based on multiple new technologies from strategic partners and will improve the production efficiency of its DLC solutions.

Management disclosed that the operating margin for the fourth quarter was 7.82%, lower than previous expectations, mainly due to the increased contribution from the hyperscale data center business and the expedited costs of DLC components in the June and September fiscal quarters. In addition, a shortage of some key new components led to a delay in revenue of $800 million, but the delivery date for these components will be extended to July, resulting in a decrease in earnings per share, which will be recognized in September.

In terms of outlook, Super Micro Computer expects its revenue for the first quarter (third quarter) of the fiscal year 2025 to be between $6 billion and $7 billion, surpassing Wall Street's expectation of $5.46 billion; it expects quarterly earnings per share to be between $6.69 and $8.27, with a median of $7.48, lower than the market's general expectation of $7.58.

Management expects revenue for the fiscal year 2025 to be between $26 billion and $30 billion, and believes that short-term profitability pressures will be alleviated, and will return to the normal range before the fiscal year 2025 when DLC and DCBBS begin to be delivered in volume. Delivery in the short term will still be under pressure due to supply chain bottlenecks of some key new components, but production costs will be reduced as the factory output in Malaysia and Taiwan expands, and economies of scale from the expansion of business in the Americas and Europe are realized.Company President and CEO Liang Jianhou stated that the robust growth is attributed to the company's technological and product leadership in the artificial intelligence infrastructure market, particularly in generative AI training and inference. The company has been rapidly expanding to ensure a large number of AI CSP opportunities and has deployed the world's largest AI supercluster.

During the earnings call, analysts raised concerns about potential delays in shipments of NVIDIA's latest Blackwell processors. Super Micro Computer, a partner of NVIDIA, manufactures AI-based servers for the chipmaker. Liang Jianhou indicated that delays are a "normal possibility" when suppliers introduce new technologies. However, he believes that Super Micro can still provide its partners with liquid-cooled solutions without significant impact. He also mentioned that the company expects minimal contributions from Blackwell in the December quarter, with sales expected to improve in the March quarter.

The AI sector may experience accelerated declines.

Super Micro Computer, which provides AI servers and has clients including NVIDIA and Musk's Xai, has seen its stock price become one of the biggest beneficiaries of this tech bull market. The company's stock price surged 246% in 2023 and tripled in the first half of 2024. Super Micro Computer was included in the S&P 500 index in March of this year and was added to the NASDAQ-100 index on July 22.

Following the earnings release, JPMorgan Chase lowered its target price for Super Micro Computer from $1,150 to $950.

Currently, the market's skepticism about the prospects of artificial intelligence is growing, with investors worried that the output may not match the substantial investments, leading to reduced efficiency for these tech companies.

Capital market concerns are also spreading upstream along the supply chain, including to Super Micro Computer. If these tech giants cut back on investments or reduce spending due to poor returns on AI projects, upstream suppliers like NVIDIA and Super Micro Computer will also be affected. This is the current market logic.

Industry leader NVIDIA will announce its second-quarter earnings on August 28. If it fails to exceed market expectations, the AI sector may face an accelerated decline.