Brett Schafer, The Motley Fool
5 min read
In This Article:
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Super Micro Computer has seen soaring revenue because of the AI boom.
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It has razor-thin margins compared to other players in the space.
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The lack of a competitive advantage should keep investors away from Super Micro Computer stock.
The boom in artificial intelligence (AI) may be hitting its next leg. Microsoft just reported accelerated cloud computing growth due to AI, while OpenAI's ChatGPT is gaining hundreds of millions of users around the globe. One stock benefiting from this recovery is Super Micro Computer (NASDAQ: SMCI). The data center assembler is up around 20% in the last month and just got an upgrade from a Wall Street analyst.
Should you buy Super Micro Computer stock to for the next leg up in AI?
In the last five years, Super Micro Computer's revenue is up over 500%. This is due to the growing spending on data center solutions from AI infrastructure providers like Microsoft. Super Micro Computer is an expert in assembling data centers with advanced computer chips from the likes of Nvidia, where Super Micro Computer spends a lot of money.
Companies like Microsoft will go to Super Micro Computer for efficient outsourcing of AI data center assembly as they try to build out more computing resources as fast as possible to keep up with demand. Management is currently guiding for $21.8 billion to $22.6 billion in revenue this fiscal year (ending in June), which is a slight decline from its previous guidance but would still represent solid growth from $15 billion in revenue last fiscal year.
As demand seems to be picking up for AI infrastructure again, Super Micro Computer is seeing its stock rocket higher. However, it is still down 67% from all-time highs and currently sports a market cap of $23 billion.
Super Micro Computer is simply a middleman for computer chips and data centers. Nvidia has a 62% operating margin. Amazon Web Services (AWS) has a 37.5% operating margin. Last quarter, Super Micro Computer had a gross margin under 10%.
What does this mean? Super Micro Computer is able to sell its products at only a slight premium to its input costs, which gives it extremely slim profit margins compared to its suppliers and customers. Nvidia and the AI cloud infrastructure companies hold a lot of power in the relationship. Last quarter, Super Micro Computer had a slim operating margin of just 3.2%.
This could pose trouble in a cyclical downturn, which will eventually come for the AI market. This is the ideal operating environment for Super Micro Computer -- you couldn't ask for more demand from customers -- yet it still is barely generating a profit.
