Brett Schafer, The Motley Fool
5 min read
In This Article:
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Super Micro Computer is riding the wild AI market.
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The company has slim gross margins because it functions as a middleman in the AI supply chain.
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Buying the stock today comes with major risks.
The roller-coaster ride of volatility continues for Super Micro Computer (NASDAQ: SMCI) stock. At one point in the last five years, the computer rack assembler for artificial intelligence (AI) data centers was up over 4,000%. Last year, the stock fell almost 90%. Today, it has recovered some of these losses and has surged in the past month, but it is still off 62% from all-time highs. It sits at a market cap of $26.7 billion, down from an all-time high of $67.2 billion.
Super Micro Computer has been a big beneficiary of the booming spending on AI data centers. Does that mean you should buy the stock after its recent surge?
Infrastructure for the burgeoning AI space requires an immense number of advanced computer chips, typically from companies such as Nvidia or Advanced Micro Devices. One company that works as a middleman between these chipmakers and AI companies is Super Micro Computer. It buys computer chips and then uses its expertise in computer rack assembly and energy-efficient innovations to optimize data centers for the big cloud computing providers and other companies investing in AI.
This middleman has gone from a backwater in the industry to ever more important as companies try to juice more and more optimization out of their computer chips and electricity sources. It is no surprise, then, to see Super Micro Computer's revenue up to over $20 billion compared to $3.34 billion in fiscal year 2020. Explosive growth has propelled Super Micro Computer to new heights on the back of the AI revolution. With analysts expecting spending on AI infrastructure to surge over the next few years, bulls on Super Micro Computer stock can point to a rising tailwind for this leader in computer rack assembly.
One problem with Super Micro Computer: It is sandwiched between immensely powerful suppliers and customers. Its prime customer is Nvidia, which has a lock on AI computer chips and consistently implements price hikes on its customers like Super Micro Computer.
On the other side, you have customers like Microsoft Azure and Amazon Web Services (AWS), which have a ton of negotiating leverage as well. This issue shows up in Super Micro Computer's gross margin, which has fallen to 11.27% over the last 12 months. Operating margin was a slim 6% even though revenue was over $20 billion. Both sides of the supply chain have the power to squeeze Super Micro Computer on costs.
