Summary

• SMCI missed revenue estimates for the Dec'24 quarter and also revenue guidance estimates for Mar'25 and FY25. But I am bullish due to a 65% growth outlook for FY26.

• Margin erosion is a headwind and although there are positive catalysts ahead associated with new Blackwell products, I am unsure about whether those margin boosts would be permanent.

• Valuations have corrected sharply closer to longer-term averages. SMCI stock trades at a ~30% premium to those averages currently, but this is justified given >60% YoY growth ahead.

• Relative technicals on SMCI vs SPX500 show bullish strength ahead as the buyers react strongly off a key support level.

• Management has unequivocally assured investors that they would meet the 25 Feb '25 deadline to catch up on delayed filings. There are also no changes to previously reported financials. I think this is lifting an overhang on the stock. It seems opportune to buy before 25 Feb.

Performance Assessment

Super Micro Computer has significantly outperformed the S&P500 since my last update on the stock:

Performance since Author's Last Article on SMCI

Performance since Author's Last Article on SMCI (Seeking Alpha, Author's Last Analysis on SMCI)

As I had not rated it a 'Buy', this has been a missed opportunity for alpha generation.

Thesis

Although SMCI is still behind in filing for audited quarterly results for the past 2 quarters now, the company shared its preliminary Q2 FY '25 results and outlook this week. I have a bullish stance after reviewing these updates:

1. Revenue outlook is very encouraging

2. Margin erosion is a headwind, but there are positive catalysts ahead

3. Valuations have corrected sharply closer to longer-term averages

4. Relative technicals show bullish strength at a key support level

5. Assurances of delivering on delayed filings can lift an overhang on the stock

Revenue outlook is very encouraging

SMCI's Q2 FY '25 results missed consensus expectations. The $5.5 billion revenues outlook for the Q3 FY '25 Mar '25 quarter also fell short of Wall St estimates by 7.6%:

Revenue Guidance Surprise vs Consensus (Capital IQ, Author's Analysis)

Looking out one more quarter for the full FY '25 expectations, management reduced their revenue guidance expectations from $26-30 billion to $23.5-$25 billion.

Despite these disappointments, I lean bullish on the company's revenues outlook, encouraged by management's FY '26 (Jun '26 quarter) guidance for $40 billion in sales, corresponding to an almost 65% YoY growth from expected FY '25 figures:

TTM Revenues (USD mn) (Company Filings, Author's Analysis)

In the chart above, the Mar '25, FY '25e and FY '26e numbers are based on management's guided figures.

The key driver of this growth is increased adoption of SMCI's direct liquid cooling solutions (DLC) as they are installed in new data centers. SMCI's value proposition here is in providing its customers with up to 40% lower total cost of ownership.

Super Micro is the disrupted leader in driving industry-wide adoption of DLC technology, which reduced customers' OpEx and achieve green computing. We expect more than 30% of new data centers worldwide to adopt liquid cooling infrastructure within the next 12 months, driven by the rapid and continual growth of AI… The true value of Data Center Building Block Solution is to save power, reduce space and decrease water consumption, resulting in up to 40% lower TCO for our customers according to our detailed calculation.

- CEO Charles Liang in the Q2 FY '25 call

The reason for a growth tick up in FY '26 is that the company needs to first sort through some backlog that is facing supply-side constraints. Also, many customers are yet to complete their data centers for DLC installation:

While most of the key components are ramping at a full speed, it will take some time to fulfill our current AI solution backlog… Some customers also need more time to finish their DLC data center buildout. At the same time, we see strong new demands by keeping coming from enterprise CSPs [cloud service providers] serving entity and hyperscale…

- CEO Charles Liang in the Q2 FY '25 call

What encourages me the most is the fact that management believes the $40 billion 65% YoY growth in FY '26 is a conservative estimation, with ample upside potential at current production capacities as evidenced by low utilization rates:

So the coming year, fiscal '26 at this moment, we believe at least we will grow 65% at least. So that's, I believe, a very conservative estimation. And the past in production capacity, I mean, U.S.A. now our utilization rate only about 55%, Taiwan utilization rate only about 60%, Malaysia utilization rate is still about 1% only. So there are lots of room to grow for us.

- CEO Charles Liang in Q2 FY '25 call

A very fair question to ask is whether management's narrative is believable. I am willing to bet that it is because the company generally has a good track record in beating guidance expectations as seen in an earlier chart above. I suspect that the last 3 quarters are an anomaly. Given SMCI's ~30% market leadership in DLCs and high data center capex spending signals from major technology giants (Microsoft (MSFT), Google (GOOGL), Amazon (AMZN) and especially Meta (META)), I think the revenue outlook is very encouraging.

Margin erosion is a headwind, but there are positive catalysts ahead

SMCI's gross profit margins have been on a declining trend. The Mar '25 quarter's guidance of 12% does not change this fact:

Gross profit margin (Company Filings, Author's Analysis)

The numbers above have restated Q4 FY '24 (Jun '24) financials which had increased inventory charge of $45 million due to a market value decline of some inventory on non-cancellable purchase orders.

Management attributes this ongoing margin pressure to a suite of factors:

Margin was temporarily under pressure due to the 10K delay disruption, the new product R&D investment and customer and product mix

- CEO Charles Liang in the Q2 FY '25 call

I am a bit skeptical about whether these effects are as temporary as the CEO indicates. According to Liang, the introduction of a new product (NVIDIA's (NVDA) Blackwell chips) would be a margin lever for SMCI:

For sure, when product becomes mature, like H100, H200, then we had to face price competition strongly. But for Blackwell, doesn't matter GB200 or B200, for sure, whenever they are new product, our margin will become much better.

- CEO Charles Liang in the Q2 FY '25 call, Author's bolded highlights

But note how a mature product seems to face strong price competition. So this makes me wonder if the margin ticks up coinciding with new product introductions is the actual temporary phenomenon. In any case, whilst I acknowledge the positive catalysts for margin expansion, I think the longevity of the effects arising from the new products catalyst is something to monitor.

Valuations have corrected sharply closer to longer-term averages

1-yr fwd PE and MCAP (USD mn) (Capital IQ, Author's Analysis)

SMCI is trading at a 1-yr fwd PE of 16.15x vs the longer term median average of 12.50x. This is a 29.2% premium. However, I think this premium is well justified given the much higher >60% YoY revenue growth outlook; something that was not present in much of the 2013 - 2022 time period in which the stock traded near 12.50x.

Relative technicals show bullish strength at a key support level

If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do. All my charts reflect total shareholder return as they are adjusted for dividends/distributions.

Relative Read of SMCI vs SPX500

SMCI vs SPX500 Technical Analysis (TradingView, Author's Analysis)

SMCI vs SPX500 is bouncing hard off a key monthly support level with good engulfing bullish strength. Hence, I anticipate the upward momentum to continue. There is a seller supply area ahead at which there may be more reason for caution based on the technical charts. But for the next quarter or so, it looks like the odds favor the buys.

Assurances of delivering on delayed filings can lift an overhang on the stock

In my last article on SMCI, I lacked some confidence on whether SMCI would be able to meet the 25 Feb '25 deadline to catch up on its late filings. But that has changed now as management stated rather unequivocally that they would be able to catch up on all filings by the deadline:

we are confident that our fiscal year '24 Form 10-K and the first 2 quarters of fiscal year '25 Form 10-Q will be filed by February 25 this year - CEO Charles Liang in the Q2 FY '25 call

Also encouraging is the reconfirmation that previously issued financial statements do not require any restatement. I think this quells some of the concerns about the accuracy of past financial disclosures.

Overall, I think the market is starting to clear its doubts on SMCI, which may be why the stock has rallied strongly over the past couple of weeks. I look forward to reviewing the full financials on 25 Feb. One particular number I will be tracking is the remaining performance obligations, which is an indicator of revenue backlog. I think this may provide more color and hopefully confidence on management's ability to hit at least $40 billion in revenues in FY '26.

Takeaway & Positioning

I have missed an opportunity to capture the alpha run on SMCI over the last couple of weeks. But after reviewing the company's Q2 FY '25 preliminary update, I think there is still ample time to get in on the buys again.

Although the company missed revenue estimates for Q2 FY '25 and also fell short of consensus expectations on Q3 FY '25 and FY '25 guidances, I am encouraged by a strong 65% YoY growth guidance for FY '26 that would be enabled by higher direct liquid cooling (DLC) uptake by key data center clients.

On the gross margin side, I note that there has been a steady erosion that management has attributed to a wide variety of factors. Whilst I acknowledge that DLC usage in NVIDIA's Blackwell chips may be a catalyst for margin expansion, I have doubts on whether such a bump up would be sustainable or temporary.

SMCI's valuations have corrected sharply and are now trading at an almost 30% premium to its longer-term averages, which I deem to be rather acceptable given the much higher >60% YoY growth outlook ahead. The relative technicals vs S&P500 also paint bullish tones, as the stock has rallied hard recently, potentially in response to dwindling concerns on SMCI's ability to catch up on its late filings.

I suspect that the full financial disclosures on FY '25 will confirm the bullish story on SMCI. So the opportune time to get in on the stock would be before that.

Rating: 'Buy'

How to interpret Hunting Alpha's ratings:

Strong Buy: Expect the company to outperform the S&P500 on a total shareholder return basis, with higher than usual confidence. I also have a net long position in the security in my personal portfolio.

Buy: Expect the company to outperform the S&P500 on a total shareholder return basis.

Neutral/hold: Expect the company to perform in-line with the S&P500 on a total shareholder return basis

Sell: Expect the company to underperform the S&P500 on a total shareholder return basis

Strong Sell: Expect the company to underperform the S&P500 on a total shareholder return basis, with higher than usual confidence

The typical time-horizon for my views is multiple quarters to more than a year. It is not set in stone. However, I will share updates on my changes in stance in a pinned comment to this article and may also publish a new article discussing the reasons for the change in view.