Should You Buy the Dip on Super Micro Stock?

Along with chipmaker Nvidia , Super Micro Computer (NASDAQ: SMCI) has been one of the biggest beneficiaries of the generative artificial intelligence boom, helping turn AI chips into user-ready servers. However, after rising by over 2,200% over the last five years, the company's share price growth has begun to stall. Let's dig deeper to determine if it's time to buy the dip or run for the hills.

Second-quarter earnings exposed problems

Super Micro's shares have fallen around 26% since it reported fourth-quarter earnings on Aug. 6. And this might be surprising, considering the numbers don't actually look that bad compared to a more average company. The ever-rising demand for AI hardware sent revenue up 144% year over year to $5.3 billion, while net income jumped 82% to $353 million.

With that said, Super Micro's gross margin (which measures the selling price of its products relative to their direct production costs) indicates a worrying trend -- it fell to 11.2% compared to 17% this time last year.

Management blames this problem on high supply chain costs and a tight inventory of key components, which they believe they can resolve by scaling production by the end of 2025. And new servers based on next-generation Nvidia AI chips (using the Blackwell architecture) could help power near-term growth over the next few quarters.

That said, the tightening margins mean Super Micro has failed to pass on rising production costs to consumers, suggesting a weak economic moat . The company faces competition in the server market from rivals like Dell and HP Enterprise , which could pressure its market share as it seeks to balance its selling prices with its production costs to maximize profits.

Short-sellers spread uncertainty

As if Super Micro's operating challenges were not enough, the company also faces the problem of unwanted scrutiny. On Aug. 27, short-selling organization Hindenburg Research released a report accusing the server maker of accounting manipulation, self-dealing, and sanctions evasion related to potential exports to Russia.

While serious, these accusations should be taken with a grain of salt because of the short-seller's interest (they make money if shares go down). And, Super Micro is yet to respond.

Image source: Getty Images.

That said, the Hindenburg report also notes the issue of Super Micro's gross margins, which are shaping up to be a big pressure point for investors.

It highlights rising competition from companies like Foxconn, which recently announced plans for significant growth in its AI server business. Hindenburg also claims Taiwanese original design manufacturers (ODMs) can operate in the AI server industry with significantly lower prices than Super Micro and could eventually take away its market share. We've got the same necessary grain of salt here, but these theories make sense to me.

Super Micro's decision to delay filing its full-year financial report a day after Hindenburg's scathing report does little to soothe market fears that something might be wrong with its accounting practices. In 2020, the company was fined $17.5 million by the SEC for accounting violations and improperly reported revenue.

The stock is dirt cheap

Super Micro's valuation is shockingly low compared to its triple-digit growth rate. With a forward price-to-earnings (P/E) multiple of just 13, shares are significantly cheaper than the S&P 500 index's average of 23. Despite the company's recent challenges with gross margins, it is hard to make sense of this rock-bottom valuation based on Super Micro's operating performance alone.

The company isn't valued where one would expect for a tech company in a red-hot industry like generative AI. And the market might be pricing in the possibility that some of Hindenburg's allegations are true. Despite the tantalizing valuation, I think investors should avoid Super Micro stock until more information becomes available.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy .