What's Behind the Latest Super Micro Computer Stock Downgrade?

Once a major beneficiary of the artificial intelligence (AI) wave, Super Micro Computer, Inc. (SMCI) is now under a dark cloud of uncertainty. After a sharp post-earnings slide, short-seller Hindenburg Research unleashed a wave of allegations last month, accusing the company of accounting manipulations, export control violations, and self-dealing.  

The report effectively resurfaced old regulatory issues, with concerns over the re-hiring of executives linked to previous scandals and deals involving CEO Charles Liang’s family-controlled suppliers. Furthermore, Hindenburg’s report also suggested sanction-dodging exports to Russia and the loss of support from key clients like Nvidia (NVDA) and Tesla (TSLA). 

The Hindenburg report itself made a fairly limited impact, but the next day, Super Micro Computer announced a delay in filing its annual Form 10-K with the Securities and Exchange Commission (SEC), citing the need for extra time to assess the effectiveness of its internal controls. This rattled investor confidence, with SMCI stock reeling on the news, and sent some formerly bullish analysts to the bearish camp. 

Notably, JPMorgan initially defended Super Micro against the Hindenburg allegations, representing a high-profile vote of confidence - but the brokerage has since backed down from that stance with a new downgrade of SMCI. So, what sparked the about-face? Let’s take a closer look to find out. 

About Super Micro Computer Stock

Founded in 1993, California-based Super Micro Computer, Inc. (SMCI) has emerged as a global leader in high-performance server, liquid cooling technology, and storage solutions, specializing in systems optimized for demanding computational workloads. With a market cap of around $23.08 billion, Super Micro caters to enterprise data centers, cloud computing, AI, and 5G edge computing worldwide. 

Following a historic two-year rally, Super Micro stock made its debut in the prestigious S&P 500 Index($SPX) in March, replacing Whirlpool Corporation (WHR). By July, it had also secured a spot in the Nasdaq-100 Index($IUXX), cementing its status among the market’s elite. 

Even after the company’s steep 66.4% pullback from its March highs, SMCI stock is up more than 51% over the past year and 47% on a YTD basis, outshining the broader SPX’s returns of 22.1% over the past year and 14.9% on a YTD basis. 

From a valuation perspective, SMCI stock is trading at 13.56 times forward earnings, which is lower than the tech sector median, as well as its own five-year average. 

Super Micro Slides After Q4 Earnings Fall Short 

After the company released its fiscal Q4 earnings results on Aug. 6, which fell short of Wall Street’s bottom-line expectations, shares of Super Micro took a nosedive, plummeting more than 20% in the subsequent trading session. SMCI’s net sales of $5.3 billion shot up a notable 143.6% year over year, and topped estimates marginally. 

However, despite an impressive 78.1% annual growth, Super Micro Computer’s adjusted earnings of $6.25 per share missed Wall Street’s expectations by a wide 23.2% margin. The company also disclosed a sharp decline in gross margin to 11.2% for the quarter, down from 17% in the year-ago quarter and 15.5% in fiscal Q3. This steep drop in profitability contrasts sharply with CEO Charles Liang’s claim of record demand for the company’s new AI infrastructure. 

As of June 30, Super Micro Computer reported approximately $1.7 billion in cash and cash equivalents, against a hefty $2.2 billion in bank debt and convertible notes. Plus, the company also announced a 10-for-1 stock split alongside its Q4 earnings release, with the split scheduled to take effect on Oct. 1.

For Q1 of fiscal 2025, management projects net sales to range between $6 billion and $7 billion, while adjusted EPS is expected to land between $6.69 and $8.27. Looking forward to fiscal 2025, the company anticipates net sales to range between $26 billion and $30 billion.

Analytics tracking Super Micro Computer project the company’s profit to hit $28.50 per share in fiscal 2025, up 41.9% year over year, and climb another 11% to $31.63 per share in fiscal 2026. 

What Do Analysts Expect for Super Micro Computer Stock?

After the release of the Hindenburg short report, JPMorgan was one of the first - and only - big-name brokerage firms stepping up to defend Super Micro Computer. 

The firm initially brushed off the short seller’s claims, stating there was "limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC" and found little new information about SMCI’s existing connections with businesses owned by the founder's siblings.

However, JPMorgan has since shifted its stance, downgrading SMCI stock from “Overweight” to “Neutral” alongside a hefty price target cut.   

In a carefully worded note, JPMorgan analyst Samik Chatterjee explained, “our downgrade is not led by lower confidence in the company’s ability to regain compliance in relation to regulatory filings or related to any of the tenets of the Hindenburg report but more so driven by a 1) near-term view where there is a not a clear rationale for new investors stepping into SMCI shares while uncertainty exists around regaining compliance and 2) the watch-point in relation to follow-up response from Super Micro to ensure that customers do not divert orders, which could involve aggressive pricing, in our view, and the competitive response from peers.”

Chatterjee also slashed SMCI’s price target nearly in half, from $950 to $500. 

Overall, Wall Street is still cautiously optimistic on SMCI, which is clinging to a consensus “Moderate Buy” rating. Of the 12 analysts covering the stock, four advise a “Strong Buy,” seven suggest a “Hold,” and one analyst advocates a “Strong Sell.” 

Just two months ago, though, the picture was much more bullish, as SMCI had seven “Strong Buys” and only four “Holds.”

The mean price target for SMCI has also been declining lately, but still stands at an ambitious $819.07 - indicating an expected upside potential of 94% from current levels.