Super Micro Computer Shares Downgraded

Investing.com — Shares of Super Micro Computer, Inc (NASDAQ:SMCI) were down on Wednesday following a downgrade from Barclays.

Super Micro Computer shares decreased by 3% in pre-market trading at 8:18 am (1214 GMT).

Barclays’ analysts expressed concerns about SMCI’s future prospects, resulting in a downgrade to an equal weight rating and a revised price target of $438. This downgrade is primarily due to the company’s declining gross margins, ongoing customer losses, and issues related to internal controls.

Key Factors Behind the Downgrade

One significant factor is SMCI’s recent performance in gross margins. In the June quarter, the company’s overall gross margin plummeted to 11.3%, a 430 basis point decline from the previous quarter. The gross margin for AI servers was reported to be in the high single digits, while margins for Dedicated Liquid Cooling (DLC) servers were even lower.

Barclays analysts noted, “SMCI has been giving away DLC components for free to match or price below the air-cooled rack pricing provided by Dell (NYSE:DELL).” The pricing strategy, along with supply chain constraints, has pressured margins, leading to concerns about potential P/E multiple compression and decreased investor confidence.

Market Share Concerns

“SMCI has been losing market share with its top two customers: Musk entities and Coreweave (private, not covered, except for TSLA),” analysts reported. Previously, SMCI had an exclusive supplier relationship with Musk Inc., but recent developments have resulted in an even split between SMCI and Dell. Consequently, SMCI’s market share is forecasted to drop to around 50% by June 2024 from 100% in 2023. Coreweave has also reduced its reliance on SMCI due to improved GPU supply and Dell’s stronger competitive position.

GB200 Server Platform Uncertainty

Additionally, uncertainty looms over the new GB200 server platform. Analysts worry that SMCI might capture a smaller market share in GB200 servers compared to its position with Hopper-based servers. Expected lower margins for GB200 servers could further impact SMCI’s profitability, especially considering the absence of definitive customer orders for the platform amidst intensifying competition.

Internal Control and Governance Issues

Barclays also raised concerns regarding SMCI’s internal controls and corporate governance. The delay in filing the 10-K report raised red flags about transparency. The company’s lack of detailed financial disclosures, including quarterly order intake and backlog figures, has sparked controversy. This, coupled with its past regulatory issues and a prior Nasdaq delisting, intensifies the scrutiny.

Adjusted Price Target

Considering these issues, Barclays has revised the price target for SMCI to $438, utilizing a valuation multiple of 12x FY25E EPS of $36.48. This new target aligns more closely with Dell’s valuation, reflecting a cautious stance in light of current margin trends and internal challenges.

While Barclays remains optimistic about the long-term prospects of the AI sector, it has identified Flex (NASDAQ:FLEX) as a preferred alternative investment. Flex’s increasing involvement in switch tray and power components for GB200 systems, along with its advancements in Google (NASDAQ:GOOGL) TPU server assembly, makes it a more attractive option in the current market environment.