Few stocks have captured the AI server boom like Super Micro Computer (SMCI) .
Skyrocketing this year, Super Micro’s become a go-to for investors betting on liquid-cooled racks and next-gen AI data centers.
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Its fundamentals are excellent, as the orders keep piling up, with the stock crushing broader markets.
However, a surprise twist could test just how bulletproof that rally really is.
A fresh take on Super Micro’s future just dropped, and it could leave its most die-hard fans bracing for a shock they didn’t see coming.
How Super Micro went from niche player to AI server heavyweight
Super Micro flipped the script, sprinting to the front of the AI server race and catching its rivals off guard.
A glimpse of that can be seen from its incredible top-line expansion, with AMD currently posting over 82% year-over-year growth in sales.
AMD’s secrets have been complete AI “factories” layered with Nvidia’s Blackwell GPUs and AMD’s EPYC chips.
Earlier, it used to sell just custom chassis, but now it bundles everything from switching boards and dense GPU racks to advanced cooling.
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That’s essentially everything big cloud providers and enterprise customers need to train huge AI models.
Arguably, the star of the show this year has been the 4U RTX PRO server.
It packs eight Nvidia Blackwell RTX 6000 cards and next-gen PCIe Gen 6 networking to move 800 Gbps of data through a single chassis.
Early performance tests have shown it efficiently matches larger, pricier setups.
Those margins are likely to be critical going forward.
Gross margins dropped from 18% in 2023 to under 10% expected later this decade. Still, Super Micro keeps underpricing bigger rivals without sacrificing performance.
Corporate governance hasn’t been smooth sailing, either.
Delayed audits and a Justice Department probe forced the business to tighten controls and bring in a new auditor. On top of that, its supply chain moves have also been mighty ambitious.
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Nevertheless, a $20 billion deal with DataVolt should boost hyperscale capacity, and a new plant in the Netherlands could help dodge chip shortages and tariffs.
There are a ton of challenges for it to contend with, though.
Dell and HPE are pushing their own AI server stacks, pressurizing Super Micro to cut prices even more.
Any delays in scaling its European plant or new export curbs on GPUs could crimp growth fast.
Hence, despite the transformation from a boutique parts maker to a serious AI hardware architect, Super Micro needs to continue executing impeccably to stay ahead.
Bank of America sees big trouble ahead for Super Micro stock
Super Micro Computer has emerged as a big winner on the stock market this year, gaining over 60%, but Bank of America’s recent note could put a dent in that rally.
Analyst Ruplu Bhattacharya restarted coverage with an Underperform rating, slapping on a fresh $35 price target.
That implies a worrying 30% drop in stock price from where it trades currently.
Bhattacharya feels Super Micro’s profit machine could run into a wall.
Competition is heating up quickly, as tech darlings like Dell and HP Enterprise muscle into the AI server space.
These giants have the scale and deep ties with big-ticket customers that could force Super Micro to cut prices while staying competitive.
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Right now, Super Micro’s gross margin currently stands at 11.3% for FY25, but BofA expects that to drop to 9.4% by FY27.
That’s a deep slide for a hardware company trying to keep investors excited.
To make matters worse, Bhattacharya warns of shortages of critical components, including high-end GPUs and liquid cooling parts.
In addition, despite the company being first to the market with advanced liquid cooling tech, that lead may not last long. Rivals are racing to adopt the same tech, which could wipe out a key competitive edge.
Top that off with Super Micro’s ongoing legal concerns and weak internal controls, and Bhattacharya thinks the risks now outweigh the upside.
Although he does see sales remaining strong, lower profits could overshadow top-line growth.
Related: Amid AI boom, veteran analyst reboots AMD, Supermicro stock price targets
