This Is the Biggest Risk With Super Micro Computer Stock

Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, has been in the doghouse with investors over the past year. There have been concerns around its financials and the reliability of its numbers after its auditor quit, and there were even worries that it may get delisted for being late filing its quarterly and annual reports.

Thankfully, the company no longer seems to be facing that risk. But that doesn't mean the tech stock is a risk-free investment by any means. In fact, the one problem that I saw as being the biggest reason to avoid the stock still remains a concern, and until it's fixed, I wouldn't be surprised if growth investors remain on the sidelines.

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The company's gross margins are atrocious

One of the most important numbers investors should consider when looking at a stock is its gross profit margin. This tells you how much of every dollar of revenue is left after cost of goods sold, to help the business cover its overhead and other operating expenses. A low gross margin can work if a company does significant volume, but it's not easy.

A low gross margin has been a problem I noted with Supermicro in the past, and unfortunately, it not only didn't improve but has gotten worse.

SMCI Gross Profit Margin (Quarterly) data by YCharts

Supermicro's margins have been trending down for over a year. This is a problem because while the company is growing its top line, it isn't necessarily making strides toward profitability.

What stuck out to me in the company's most recent earnings report was that while net sales of $4.6 billion were up 19% year over year, thanks to strong demand for its storage and server solutions, the company's gross profit actually declined by 26%, to $440 million. The reason is that the company's gross profit margin fell considerably, from more than 15% to less than 10%. The increase in revenue was more than offset by a worsening margin.

Supermicro's earnings are going in the wrong direction

This past quarter, Supermicro's quarterly net income totaled less than $109 million -- its lowest level since 2023. While earnings can fluctuate from one period to the next, it's a troubling trend nonetheless for the business.

SMCI Net Income (Quarterly) data by YCharts

The danger is if the company's profits don't improve, that could make it a more expensive buy. And that could be the case if it isn't able to strengthen its gross margins.

The company is forecasting diluted earnings per share (EPS) of $0.30 to $0.40 for the current June quarter. If that were to hold up for an entire year, at the top end of that range, the company would post a diluted EPS of $1.60. And based on a share price of $33 (which is around Monday's closing price), that would mean it's trading at around 21 times its future earnings. That's right in line with the S&P 500 (SNPINDEX: ^GSPC) average. But that's also assuming that spending on servers and data centers and tech infrastructure remains strong, which is by no means a given amid the current macroeconomic conditions.

Supermicro may look cheap, but it's still risky

In the past 12 months, Supermicro shares have fallen close to 60%. Even if you think it's a great business to invest in due to artificial intelligence, if its margins remain slim, then any growth it generates may not necessarily translate into a big improvement on its bottom line. And that can make this cheap-looking stock appear much more expensive.

Given all the risk and volatility around Supermicro, you're likely better off keeping the stock on a watch list rather than in your portfolio.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.