Why Super Micro Computer Stock Took Off in August
Key Points
Super Micro saw its gross margins nearly double in the June quarter.
It also forecast revenue well above analyst consensus for the year ahead.
An independent investigation cleared management of knowledge of the diversion of some servers to China.
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Shares of AI server leader Super Micro Computer (NASDAQ: SMCI) rallied 31.3% in August, according to data from S&P Global Market Intelligence.
Super Micro reported its fiscal fourth-quarter results in August, delivering an earnings beat and an impressive outlook for the year ahead. Furthermore, the company completed its internal investigation into the illegal diversion of certain servers to China, in violation of U.S. export controls.
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The report cleared senior management of any culpability, as the compliance lapse seems to have been the work of a small number of employees. That report, combined with Super Micro's impressive margins and outlook, appeared to put some lingering worries behind the company's investors.
Super Micro's gross margins nearly double
Beyond Super Micro's corporate governance concerns, the big worry about the company has been its gross margins. Fortunately, Super Micro showed a massive improvement on that front.
June quarter earnings showed revenue up 91.7% year-over-year to $11.1 billion, which is obviously strong growth, though the top line slightly missed analyst expectations. However, Super Micro's adjusted (non-GAAP) earnings per share of $1.70 trounced expectations by a whopping $0.74.
The massive profit beat came thanks to a near-doubling of gross margins, from 9.5% in the year-ago quarter to 17.5%. Of note, Super Micro's traditional target gross margin range before the AI revolution was 14%-17%. However, as super-expensive GPU-based AI server growth took off, Super Micro's gross margins declined into the single digits.
The June quarter appeared to mark a change in the recent trend, with a 17.5% gross margin exceeding even Super Micro's traditional target range. Management attributed the higher gross margin to two main factors: first, a pivot toward enterprise servers, likely for agentic CPU-based workloads. The shift from massive training clusters to more dispersed, agentic inference AI workloads likely gives Super Micro greater pricing power with customers relative to its large, high-volume training-cluster customers, such as Space Exploration Technologies (NASDAQ: SPCX).
Second, Super Micro attributed the margin improvement in part to the ramp of its data center building block solutions (DCBBS). This is Super Micro's modular data center offering, which delivers faster time-to-market and lower costs through end-to-end standardization of the entire data center infrastructure. Super Micro has said DCBBS is a higher-margin product for the company.
In addition to the margin improvement, Super Micro also forecast revenue of $65 billion to $72 billion for the year ahead. That forward guidance was well above analyst estimates of $53 billion and fiscal 2026 revenues of $39 billion.
Image source: Getty Images.
Aside from earnings, on Aug. 20, Super Micro disclosed that an investigation into the smuggling of some of its servers to China found that senior management had no knowledge of or responsibility for it. The investigation also turned up new recommendations for the company's compliance program going forward.
Finally, Super Micro ended the month with another vote of confidence as enterprise networking giant Cisco announced it was adopting Super Micro's liquid and air-cooled servers as part of its Secure AI Factory offering. The new partnership gave a vote of confidence and helped ease investor fears over Super Micro's governance and technology.
Super Micro remains among the cheapest of AI stocks
Even after its strong August run, Super Micro trades for just nine times this year's forward earnings estimates. That ranks it among the cheapest AI hardware stocks.
That undervaluation likely stems from lingering concerns over corporate governance and margins. However, it appears Super Micro made strides in getting past some of those concerns last month. If management keeps up the execution, Super Micro's valuation could climb, on top of its outsize earnings growth, in the quarters ahead.
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Billy Duberstein and/or his clients have positions in Super Micro Computer. The Motley Fool has positions in and recommends Cisco Systems. The Motley Fool has a disclosure policy.
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