Are Super Micro Computer shares worth buying now?

After an excellent start to the year, Super microcomputer‘S (SMCI 4.59%) The stock’s chart has taken a drastic turn over the past six months. It has lost nearly 60% of its value since its peak, and recent events look set to further erode investor confidence in the company.

First, fiscal 2024 fourth-quarter results released on Aug. 6 fell short of Wall Street expectations, and management’s guidance was disappointing. Second, Hindenburg Research, a bearish stock, released a report alleging accounting irregularities at Supermicro. Supermicro’s board then announced it was delaying its annual report, which only added to the negative press.

These factors explain why Wall Street analysts have been downgrading the stock recently. But with shares of the server and storage maker now trading at an attractive 22 times past earnings and 13 times future earnings, opportunistic investors may be tempted to buy Supermicro stock. Should they do so in light of recent events?

Drawing attention to a problem that is not solved

Investors should remember that Hindenburg is a short seller and has a financial interest in seeing Supermicro’s stock price fall. In this context, we can’t be certain that Hindenburg’s allegations are valid, especially given that the short seller has been wrong in the past. That said, Supermicro was accused of accounting violations by the Securities and Exchange Commission (SEC) in August 2020, when it was found that it had prematurely recognized revenue and underreported expenses over a three-year period.

However, the company has since recovered, posting remarkable gains over the past few years thanks to the emergence of a new catalyst in the form of artificial intelligence (AI). Its revenue in fiscal 2024 more than doubled to $14.9 billion from $7.1 billion in the prior year. Non-GAAP earnings rose to $22.09 per share from $11.81 per share in fiscal 2023.

Addressing the delay in Supermicro’s annual report, management explained that “we do not anticipate any material change to our financial results for the fourth quarter or fiscal year 2024,” adding that the company expects a “historic” 2025 with “record order volume, a strong and growing backlog of project wins, and market leadership in multiple areas.”

Supermicro says the recent events will not impact its production capabilities and that it is on track to meet demand for its AI server solutions. Notably, Supermicro expects its revenue in fiscal 2025 to be between $26 billion and $30 billion. That would be another year of remarkable growth from $14.9 billion in fiscal 2024.

While the company is facing margin challenges due to increased investments it has made in capacity expansion to meet strong demand for its liquid-cooled server solutions, management is confident that it will return to normal margin range by the end of the fiscal year. Analyst consensus estimates also indicate that Supermicro’s earnings are on track to grow at a breakneck pace in the current fiscal year, followed by solid gains over the next few years.

SMCI earnings per share estimates for the current fiscal year according to YCharts.

What should investors do?

The delay in Supermicro’s annual filing led to JPMorgan downgrade the stock from “overweight” to “neutral” and lower the target price from $950 to $500. Even Barclays downgraded the stock from “overweight” to “equal weight,” citing the margin pressures Supermicro is facing as well as a delay in filings. However, JPMorgan’s downgrade was not a result of the Hindenburg report or a reflection of its ability to adapt, but rather because of the near-term uncertainty surrounding the company and the lack of a compelling case for buying the stock.

So risk-averse investors should wait for more clarity before buying this AI stock. However, risk-averse investors looking to add a fast-growing company to their portfolios can consider buying Supermicro now. It seems poised to sustain its impressive growth over the long term, thanks to the huge opportunity it offers in the AI ​​server market.

Analysts expect Supermicro’s earnings to grow 62% year-over-year over the next five years. If the company can overcome its current problems, it could prove to be a solid investment given its current valuation.