Why Super Micro Computer Fell Over 36% in June

Shares of AI server leader Super Micro Computer (NASDAQ: SMCI) plunged 36.4% in January, according to data from S&P Global Market Intelligence.

Super Micro had rallied heading into the month, but the stock experienced another sharp pullback after selling common stock and convertible notes. Despite the share sales being necessary only for large orders, investor trust in Super Micro is rather low right now, and the market appears to have priced in the dilution effects of the securities sales without much, or any, of the benefits.

In addition to the early month dilution announcements, more Super Micro employees were arrested in Taiwan as part of the country's efforts to clamp down on illegal smuggling of AI servers to China.

The Super Micro roller coaster experiences another dip

Things appeared to be looking up for Super Micro heading into June. Back in March, a small number of Super Micro employees were arrested on charges over a scheme to illegally export Super Micro's advanced AI servers to China. That had sent shares spiraling; however, the malfeasance appears to have been the work of a handful of employees, and not the company itself.

A subsequent strong earnings report in May, as well as a late-May announcement that Super Micro was working with the Taiwanese government to foil additional smuggling activity, sent shares higher heading into June.

However, Super Micro subsequently announced it would raise a stunning $7 billion from the equity markets to fund AI chips and other components to fulfill large recent orders. The capital raise consisted of $1.25 billion in equity sales and $3.75 billion in convertible notes, along with a $2 million at-the-market equity sales program that will begin later in the year.

Unfortunately for Super Micro, the stock sold off heavily in the days leading up to the announcement. As such, Super Micro wound up selling stock at $27.50 per share, a figure nearly 50% below its recent high at the beginning of the month. Meanwhile, even the convertible notes were priced with a 7% dividend and a strike price between $30.30 and $36.36, which seems expensive for the company.

Now, Super Micro did note that it had received a massive $39 billion in orders "in recent weeks" leading up to the capital raise announcement. For reference, Super Micro forecasts making roughly that amount of revenue in the fiscal year that just ended in June. Getting a year's worth of orders in just a few weeks is certainly a positive, but it also means Super Micro needed more capital to invest in that growth.

The problem is that over the past year-plus, Super Micro's gross margins have declined, leaving investors wondering whether the company actually makes enough profit, even on a very high order volume, to justify the dilution.

Image source: Getty Images.

Additionally, toward the end of the month, Bloomberg reported that Taiwanese authorities had raided Super Micro's offices in Taiwan. After the month-end, it was reported that the authorities had detained four Super Micro employees, along with employees of other Taiwanese distributors and data center companies, over alleged illegal exports to China. Super Micro's Chief Revenue Officer told Reuters that Super Micro wasn't a target of the investigation, and that it had been working with Taiwanese authorities for months to stop the illegal exports.

Despite the statement, the headlines increased skepticism about Super Micro and its governance.

Super Micro is one of the cheapest AI plays now

After this string of scandals and near-scandals, Super Micro's valuation remains well below that of the vast majority of artificial intelligence-affiliated hardware companies. Shares traded at just a low-teens P/E multiple, despite what appears to be booming orders and a close relationship with Elon Musk's companies.

While gross margins, corporate governance, and the alleged illicit behavior by individual employees are overriding concerns, investors looking for high-upside ways to still play the AI boom should look to Super Micro. Just be aware that there are significant risks associated with the company's seemingly bargain-basement stock price.

Billy Duberstein and/or his clients have positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.