Will the Super Micro computer be worth a trillion dollars by 2030?

Super Micro Computer (SMCI -0.80%)also known as Supermicro, has disappointed many investors over the past six months. On March 13, 2024, shares of the server maker reached an all-time high of $1,188.07 and its market capitalization reached $67 billion.

This represented a staggering 5,080% increase over the previous four years. Supermicro’s stock caught fire as it dazzled investors with its rapid sales of high-performance servers for the booming artificial intelligence (AI) market.

Today, however, Supermicro’s stock is valued at around $420 and has a market capitalization of $25 billion. It has lost almost two-thirds of its value amid concerns about falling gross margins, short-selling allegations, a delayed annual report filing, and reports of a potential investigation by the U.S. Department of Justice (DOJ). It was a painful pullback for investors who had been chasing Supermicro’s previous growth, but could it overcome these challenges and blossom into trillions of dollars by the end of the decade?

Why did Supermicro shares soar?

Supermicro found its niche selling high-performance liquid-cooled servers. This made him a natural partner for Nvidiawhich provided Supermicro with high-end data center graphics processors ahead of many other server manufacturers.

Supermicro controls a small share of the server market compared to Dell Technologies AND Hewlett Packard Companybut sales of dedicated AI servers have surged in recent years as companies look to upgrade their data centers to support the latest AI applications.

From fiscal 2020 through fiscal 2024 (which ended in June 2024), Supermicro’s revenues grew at a compound annual growth rate (CAGR) of 45%, while adjusted earnings per share (EPS) increased at a CAGR of 68%. It currently generates more than half of its revenue from dedicated AI servers and Bank of America Analysts expect it to increase its share in this niche market from 10% to 17% over the next three years. These numbers have convinced many investors that Supermicro is a great AI play, just like Nvidia.

Why did Supermicro shares fall?

Supermicro established an early lead in the dedicated AI server market, but Dell and HPE are now ramping up production of similar high-end servers powered by Nvidia GPUs. Supermicro also sells its AI servers at a lower gross margin than non-AI servers, so the rapid expansion of its AI server business is actually a double-edged sword.

Therefore, Supermicro’s adjusted gross margin decreased from 15.9% in fiscal 2020 to 14.2% in fiscal 2024. This decline is concerning because HPE and Dell are larger companies that can afford to sell their AI servers at lower margins .

In late August, Hindenburg Research, which specializes in short-selling stocks, accused Supermicro of inflating revenues with partial orders. Supermicro denied the allegations but delayed filing its 10-K for fiscal year 2024 around the same time the Hindenburg report was released because it needed “additional time” to evaluate its “internal controls over financial reporting.” According to reports from the Department of Justice, the Department of Justice may be investigating Supermicro over this delay Wall Street Journalbut the Department of Justice neither confirmed nor denied this report.

News of these potential setbacks has sent Supermicro plummeting over the past few months. Since Hindenburg has a vested interest in Supermicro performing poorly, investors should take these allegations with a pinch of salt. Despite this, Supermicro was previously removed from the list Nasdaq due to accounting problems in 2018 and only listed again in 2020 after reaching an agreement with the US Securities and Exchange Commission (SEC).

Where will Supermicro shares be in six years?

These unresolved issues could force analysts to reduce long-term sales estimates. It’s also unclear whether it can maintain stable gross margins while keeping pace with HPE and Dell in the growing AI server market.

But for now, Wall Street is still mostly bullish on Supermicro. Of the 20 analysts covering the stock, only one rates it as a Sell. From fiscal 2024 to fiscal 2026, analysts expect the company’s revenues to grow at a CAGR of 46%, while EPS (excluding the impact of the upcoming 10-to-1 stock split scheduled for September 30) will grow at a CAGR of 39%.

That’s an impressive estimate for a stock that’s worth just 14 times this year’s earnings. Dell and HPE, which are growing much slower than Supermicro, trade at 16 and 10 times forward earnings, respectively. However, Supermicro’s valuations remain subject to compression due to near-term macro, competitive and regulatory factors.

Can Supermicro Become a Trillion Dollar Stock?

In the best-case scenario, Supermicro can meet consensus forecasts and grow its EPS at a solid CAGR of 25% from fiscal 2026 to fiscal 2030. If that happens, and the company trades at a more bullish 25x earnings, its stock could rise in approximately to 465% and increase market capitalization to almost $134 billion by the end of the decade. That would be more than double the all-time record, but would fall woefully short of joining the 12-zero club.

So instead of wondering whether Supermicro will ever become a trillion-dollar AI stock, investors should see if it can overcome its current challenges. If it fails to stabilize gross margins and address short-selling and regulatory challenges, its stock could stall and underperform industry peers over the next six years.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool covers and recommends Bank of America and Nvidia. The Motley Fool recommends the Nasdaq. The Motley Fool has a disclosure policy.