Cheap Super Micro Computer stock forms a rare dangerous pattern

Super Micro Computer (SMCI) stock price has suffered a harsh reversal in the past few months as concerns about artificial intelligence (AI) and its business have emerged. It retreated to a low of $457 on Monday, down by over 63% from its highest point this year, bringing its market cap from over $66 billion to $26 billion. 

Most AI stocks have retreated

Super Micro Computer’s stock mirrors that of other companies in the AI industry. Nvidia, which is often seen as the gold standard of the AI industry, has dropped by over 16% from its highest point this year, erasing over $300 billion in value.

AMD, a leading manufacturer of semiconductor items, has also plunged by over 31% from its highest level this year. Most notably, the VanEck Semiconductor ETF (SMH) has retreated by over 16% from the year-to-date high.

This price action is happening as companies and governments continue boosting their investments in artificial intelligence. Altogether, analysts expect that these investments will add up to over $1 trillion in the next few years.

A key concern, however, is whether these investments will ultimately pay off. While many people are using products like ChatGPT and Anthopic’s Claude, signs are that other industries are not growing as fast as expected. 

In line with this, there is a risk that the semiconductor industry will go through a boom and burst cycle as we have seen in the past.

Ideally, companies tend to boost their investments when there is robust demand, as we saw during the Covid-19 pandemic. Firms like Texas Instruments and Analog Devices boosted their investments, only for key sectors to experience a slowdown. 

Super Micro is still growing

Super Micro Computer’s business is still growing, if the last financial results are to go by. These results showed that its revenues rose to over $5.1 billion in the fourth fiscal quarter, a big increase from the $2.18 billion it made in the same period in 2023.

These results meant that its total revenue during the quarter was in par with what it made in 2022. Its annual revenue of $14.9 billion was double what it made in the last financial year. 

It has also become a highly profitable company, with its annual revenues more than doubling to $1.2 billion.

However, not everyone is convinced about its performance. In a long report, Hindenburg Report, famous for the Adani short call, noted that the firm had substantial red flags, including related party transactions, sanctions, and export control failures.

The report noted that the firm had been fined $200 million by the SEC for accounting violations. It then started re-hiring some of the affected employees and restarted improper revenue recognition.

Additionally, the company has been accused of selling products to some sanctioned entities, including those in China and Russia, which could see it fined. I believe that US authorities will start assessing these claims as they have done in the past. SMCI has denied these allegations.

The other key concern for SMCI is that competition in its business is rising. Most of this competition is coming from the likes of Dell and HP Enterprise. This competition will likely continue rising as the industry’s slowdown accelerates. 

This is notable since some clients like GMI Cloud and NexGen Cloud have experienced substantial firmware issues from SMCI’s products.

SMCI stock price also dropped after the company delayed filing its 10-K report with the Securities and Exchange Commission (SEC). The 10K report is an important document that describes what a company does, its risks, and annual statements. 

Analysts are upbeat about SMCI

Despite its woes, analysts are still upbeat about SMCI stock. According to Yahoo Finance, the average estimate for the stock is $803, a 80% increase from the current level.

Some of the most bullish analysts are from Needham and Wells Fargo. However, others like JPMorgan, Barclays, CFRA, and Bank of America have recently downgraded the company, citing the weak growth in its business.

Still, analysts expect that its revenue will be $6.5 billion this quarter, up by 214% from the same period in 2023. For the year, its revenue will come in at $28.18 billion followed by $33.2 billion. 

If these numbers are accurate, it means that the company is highly undervalued, trading at a forward P/E ratio of 15.5, lower than the sector median of 28. Its forward PEG ratio of 0.30 is also lower than the median estimate of 1.90.

Super Micro Computer stock analysis

The daily chart shows that the SMCI share price peaked at $1,227 in March and has dropped by over 60% to the current $457. It recently formed a death cross pattern as the 200-day and 50-day Exponential Moving Averages (EMA). 

The stock has also dropped below the key support at $670, its lowest swing in April this year. Therefore, SMCI will likely remain under pressure in the near term as investors wait for its earnings on October 30th. In the long term, the stock will likely bounce back and retest the resistance point at $670.

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