Summary

• Super Micro Computer offers a rare buying opportunity, trading at a significant discount due to financial reporting issues and regulatory scrutiny.

• SMCI is a leader in server infrastructure technology, with strong growth prospects driven by AI data center adoption and innovative cooling solutions.

• Despite current challenges, SMCI's financial performance remains robust, with impressive revenue growth and profitability, supported by recent capital raises and strategic partnerships.

• The AI server market's rapid expansion presents substantial upside potential, making SMCI an attractive investment for those willing to accept higher risk.

Getting an opportunity to buy a well-known stock at a good value is quite a rare opportunity. This is especially true in a “hot” market environment like what we have today. In my view though, this opportunity exists for higher-risk investors in the form of Super Micro Computer, Inc. (NASDAQ:SMCI). Due to some financial reporting irregularities and a probe by regulatory agencies, its stock has fallen 83% from a high of $120 to a low of $20 back up to its current price of $48. This article will look at why this stock could be undervalued and deserves a closer look.

SMCI Story So Far

The business case and long-term trends for Supermicro still remain. The company is a leader in server infrastructure technology as it designs and manufactures a wide array of solutions for high-performance computing environments such as data centers. Its products include servers, storage systems, and racks. Its key differentiator is its Direct-Liquid Cooling (“DLC”) technology which is crucial for AI data centers. Management expects over 30% of new data centers will adopt this cooling technology over the next 12 months. I won’t dwell too much on a lengthy analysis of the business model as Supermicro is a well-known company and has been a hot stock this past year. However, I believe Supermicro, if it executes well, could be a key player in the AI revolution.

Supermicro recently released its preliminary Q2 2025 earnings, and it shows that the company has performed pretty well. These results are reflective of its ability to execute and quickly scale revenue. In fiscal Q2 2025 (ended December 31), Net Sales grew by roughly 54% to be in the range of $5.6 billion to $5.7 billion. Despite this growth, the company is expected to be profitable this quarter which is a rarity for these high-growth AI technology firms. Supermicro is expecting Non-GAAP diluted net income to grow by 5% year-over-year to a range of $0.58 to $0.60 per share or $339.6 million to $351.3 million. These results show that Supermicro is continuing to accelerate its growth plans and when combined with the stock trading somewhat cheaply should be interesting to investors.

A Chance to accumulate SMCI

Supermicro is currently trading at a discount compared to its historical figures due to the drop in its share price. Looking at the company’s Seeking Alpha quant ratings, the company has scored both an “A” and an “A-“ on both valuation and growth scores. Using management’s guidance of projected full-year sales of $23.5 billion to $25 billion and EPS of $0.58 to $0.60, I am able to calculate the individual price multiples for comparison. The reason I am using management guidance is discussed in the key risk section below.

I calculated that the company is trading at a Forward P/E ratio of between 19.9x and 20.6x after annualizing the quarter results. This multiple is lower than the Technology sector median of 33x. Looking at the Sales multiple which I prefer for fast-growing companies that are more focused on revenue as opposed to profitability, the P/S is between 1.12x and 1.19x. Supermicro’s ratios are much lower than the technology sector median of 3.3x.

Seeking Alpha Quant

In terms of an actual price target, I will plug in Supermicro’s most recent management guidance into my 3-stage high growth valuation model. As mentioned, Management expects fiscal 2025 full-year revenue to fall within the range of $23.5 billion to $25 billion. Their target for fiscal 2026 is much more ambitious at $40 billion in revenue close to a 60% growth in revenue. This is an extremely high level of growth, but I believe that management is justified due to the rapid growth of the AI server market.

According to research firm Research and Markets, the AI server market is estimated to grow at a CAGR of 34.3% reaching $837.83 billion by 2030. This is driven by increasing adoption by industries that are beginning to rely more heavily on AI. According to the latest data, Supermicro has roughly 9% market share with the ability to gain more, especially from ODM players as more complex higher performance servers gain in importance.

Bloomberg

Therefore for my valuation model, I am assuming Supermicro’s revenues to grow in line with industry CAGR after the big revenue jump targeted by management in fiscal 2026. I believe that this is a realistic assumption given the historical growth rate of the company as well as the overall TAM of the industry. It should be noted however that valuation models are more “art” than “science” especially when trying to forecast revenues far into the future.

With regard to the company’s EBIT margins, Supermicro’s management has indicated that it expects both GAAP and non-GAAP gross margin is expected to be in the range of 11.8% to 11.9%. The entire AI server industry is undergoing a form of margin compression due to the intense competition and shortage of powerful AI semiconductors. However, it is my view that over the long term, profitability should eventually revert back to the industry average of 5.4% EBIT margin.

Author Valuation

The discount rate I used was based on figures calculated by NYU’s legendary professor Aswath Damodoran for 2025. He calculated a cost of equity of 11.88% for tech companies. For the terminal value, I used the industry Price to Sales ratio of 3.31x for the Information technology industry. For the number of shares, I have grown the share count by 7.6% per year for the life of the model equivalent to the share count growth in 2024. I have also adjusted the number of shares assuming full conversion of the company’s convertible note more details of which are discussed below.

Running the valuation model gives me a target price of SMCI stock of about $211. This is well above the stock’s current price of $48. However, there is no such thing as a free lunch in the financial world and therefore Supermicro does come with some risks.

Author Valuation

Key Risks and Mitigating Factors

So, even with all the positive catalysts, why is SMCI stock trading at such a discount? The elephant in the room is that the company is still working to finalize its most latest 10-K and 10-Q which it expects at the end of this month. The company is also dealing with controversy as it has received subpoenas from both the Department of Justice and the SEC. Therefore, it should be noted that the financial information I used on my model is based on management’s guidance therefore is preliminary and unaudited and may be subject to future revisions.

I believe though that management should be able to fix its financial reporting issues and that this was simply a result of the company growing at an astronomical pace. While delaying a filling is never fantastic news, in my view it's not the end of the world and companies can still bounce back. Major companies like Apple Inc. (AAPL) and Tesla, Inc. (TSLA) have had late fillings in the past. Therefore, I am hoping that the management of Supermicro will be able to sort this all out in quick order.

What gives me confidence regarding Supermicro’s future growth outlook and the strength of its current business is the fact that the company was able to raise additional capital. The company was able to secure $700 million in new 2.25% Convertible Senior Notes via a private placement (subject to customary closing conditions on February 20th). They were also able to amend the existing $1.725 billion Convertible Notes which will carry a 3.50% annual interest rate. While these notes were sold privately to “qualified buyers” they were placed by The Goldman Sachs Group, Inc. (GS) and Evercore Group.

In my view these creditors must have done some level of due diligence on Supermicro’s financials and growth prospects as these notes do not have interest rates that signify that the company is distressed. In other words, if Supermicro is in danger of default the interest rates on these bonds would be much higher than the current US 3-year treasury yield of 4.3% as the market would place a high credit risk spread. Since the interest rates on these convertible notes are lower in my view this could signal that investors think SMCI stock has upside potential and that the company would be able to sort out its financial reporting issues in the near future. The issuance of these notes improves the liquidity situation of the company as it already had as of the end of 2024 total cash of approximately $1.4 billion.

Furthermore, by all indications, the company is continuing to execute its growth plans. Supermicro has recently announced the full production availability of its AI data center “Building Block Solutions” which utilizes NVIDIA Corporation's (NVDA) Blackwell platform. These new systems are specifically designed to manage complex AI-related tasks and have features like next-generation liquid-cooling and air-cooling technology and up to 12 systems with 96 NVIDIA Blackwell GPUs in a 52U rack. These advancements could cement Supermicro’s leadership position and ensure that it is a key player in the extremely lucrative AI server industry moving forward. In my view, I would prefer to focus more on the operations side and news like this makes me confident that management is on track to meet its growth potential.

Supermicro

Conclusion

To wrap this up, I believe that Supermicro presents a unique opportunity for investors willing to take on high risk. It's rare to see a fast-growing stock trading at a discounted price. Despite the key risks discussed and the negative sentiment the company faces due to financial reporting issues and regulatory scrutiny, I believe that the stock is still worth considering. This is especially true as the AI server market is set to experience rapid growth thus in my view the potential rewards outweigh the risks. I believe that the stock is a "Buy"