Summary

• Super Micro has overcome accounting concerns and is poised to thrive, with U.S. hyperscalers driving AI data center spending.

• Despite a sales hit from the 10-K delay, the AI server company guided FY25 revenues to $23.5 to $25.0 billion, with a potential target of $40 billion in FY26.

• Super Micro raised $700 million via a convertible debt offering in a sign of a return in investor confidence.

• SMCI stock trades below 10x potential FY26 EPS targets, and any break of the resistance at $50 is very bullish.

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After a troubling period, Super Micro Computer, Inc. (NASDAQ:SMCI) appears to have survived accounting allegations for a second time. The AI server company took some sales hits, but the business appears set to thrive again with U.S. hyperscalers full-speed ahead on AI data center spending. My investment thesis is Bullish on the stock, especially on a breakout of resistance at $50 going back to August.

Source: Finviz

AI Rebound

Super Micro was booming heading into the end of 2H of last year when Hindenburg Research came out with a seething short report accusing the company of accounting issues. The company had already gone through similar accounting violations in the past, and the DoJ probe and 10-K delay caused the market to panic.

The short report accused the company with a lack of sufficient internal controls, alarming to the stock market and investors. Though, a lot of the allegations had to do with internal reporting and controls on related-party transactions, not so much technology related to direct-liquid cooling servers needed for the ongoing AI revolution or actual sales.

Our original theory supporting "sloppy accounting" and not fraud was the weak operating margins and volatile quarterly sales. Naturally, Super Micro would want to report higher margins and profits when undertaking an attempt to deceive investors, and the company eventually confirmed that no misconduct was found by an independent special committee.

The company isn't completely out of the woods on this issue. Super Micro had to replace the auditors, with BDO taking over and a target to release the FQ1 and FQ2 audited results on February 25 quickly approaching.

Super Micro just released preliminary FQ2 numbers, with revenue estimates of $5.6 to $5.7 billion. The business definitely took a hit with all of the accounting concerns, but the company maintained virtually all of the previous sales.

Elon Musk owned xAI was apparently a company shifting business from Super Micro. Most recently, Dell Technologies (DELL) is listed as potentially gaining a $5 billion server order from xAI after knowing Super Micro was already a huge supplier.

Regardless, Super Micro still guided FY25 revenues to $23.5 to $25.0 billion, down by $3.5 to $5.0 billion from the original target of $26.0 to $30.0 billion for the fiscal year. The company definitely took a sales hit in the short term, but the losses were far less than feared, considering the stock fell all the way to $17 in mid-November.

Super Micro was even able to raise $700 million via a convertible debt offering in an indication investors are more comfortable the AI server company doesn't have accounting issues impacting the business.

Big FY26 Guide

Considering Super Micro plunged so far a few months ago, the market thought the allegations could be near fatal for the business. Now, the company is guiding towards FY26 revenues of up to $40 billion.

Super Micro actually forecast a 60%+ rise in sales next fiscal year. The AI data center demand will definitely surge this year, with the major tech companies forecasting a massive boost in spending. In total, the big tech companies now plan to spend over $325 billion on capital expenditures in 2025.

Source: Bloomberg

The stock has already rallied back to $48, so the easy money has already been made. Super Micro will now have to deliver the projected growth in order to reward shareholders, though the stock previously topped $100 when far lower estimates were predicted.

With the disruption, the key could be the cash position, with Super Micro constantly needing access to capital to fund the massive expansion in sales. The company needs to buy the GPUs from Nvidia (NVDA) in order to build the servers.

Super Micro ended 2024 with cash of $1.4 billion and total debt of $1.9 billion. The company raised the $700 million last week and apparently ended January with a cash balance already above $2 billion, providing Super Micro with a solid balance sheet to support further growth.

The strong sales level provides another good indication that Super Micro has the liquid cooling technology needed by data center operators. The company suggests the liquid cooling market will reach 30% in the next year, and the shift to Blackwell servers provides an opportunity for tech leaders.

As the investment thesis has held for a while, Super Micro was cheap based on the big EPS boost ahead from returning gross margins back towards the higher end of the range of up to 17%. The combination of massive revenue growth and much higher margins will lead to significant EPS growth.

Super Micro guided to FY26 revenues reaching $40 billion. The company has the following basic financial models for FY26:

14% Gross Margin

• Revenue - $40 billion

• Gross profit - 14%

• Operating expense - 4%

• Taxes - 14.6%

• Net income - $3.42 billion

• EPS (653 million share) - $5.23

17% Gross Margin

• Revenue - $40 billion

• Gross margin - 17%

• Operating expense - 4%

• Taxes - 14.6%

• Net income - $4.44 billion

• EPS (653 million shares) - $6.80

The company reported a preliminary FQ2 gross margin of 11.9%, so Super Micro is close to the bottom end of the range despite the accounting concerns. The consensus analyst estimates currently sit at only $33.2 billion, producing an EPS of only $3.74.

The upside potential is substantial, especially considering how the CEO stressed the FY26 revenue guidance is very conservative. On the preliminary FQ225 earnings call, CEO Charles Liang made the following statement:

We have industry standard product line plus lots of [chip set] (ph) including some confidential product under development. And we have a customer engaged with us for those projects. So this year, even 10-K delay, we grew about 60%. Last year we grew 110%. So the coming year, fiscal 2026, 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, USA now, our utilization rate only about 55%. Taiwan utilization rate only about 60%. Malaysia utilization rate still about 1% only. So there are lots of room to grow for us.

Takeaway

The key investor takeaway is that the stock is cheap based on the earnings potential on the growth opportunities ahead. The biggest risk is that Super Micro runs into an auditing issue and the stock gets delisted. Otherwise, analysts have to substantially hike EPS estimates, leading to the stock likely trading below 10x EPS targets while the company forecasts at least 60% sales growth in the upcoming fiscal year.