Super Micro's 10-For-1 Split Can Drive The Stock Higher – Forbes

Super Microcomputer Co., Ltd. (NASDAQ: SMCI) has experienced a fair amount of volatility this year, but potential upside is in store as the company plans to complete a 10-for-1 stock split soon. SMCI shares have risen roughly eight-fold over the past two years, from roughly $60 per share in September 2022 to current levels of roughly $460, driven by strong demand for AI data center servers. However, the stock price fell sharply earlier this year amid concerns over gross margins, supply chain issues, and a delayed 10-K filing following accusations of accounting fraud by short seller Hindenburg Research. Now, with the stock poised to begin split-adjusted trading on October 1, interest in Supermicro shares could pick up again.

SMCI stock has generated better returns than the broader market over the past three years. The stock returned 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, Trefis High-quality portfolioThis fund, which holds 30 stocks, has fairly low volatility. Outperforming the S&P 500 every year During the same period. why is that? As a group, the HQ portfolio's stocks offered lower risk and better returns than the benchmark index. HQ Portfolio Performance MetricsSo how will the upcoming split affect SMCI stock?

While stock splits do not change a company's fundamental outlook, they often serve as a catalyst for a stock price surge following their announcement. This was seen during Nvidia's recent stock split and Tesla's first stock split in 2020. Moreover, stocks tend to outperform after a stock split for two reasons: they become more accessible to smaller investors, leading to increased demand and trading volume. In the case of Super Micro, the price per share would fall from the current $460 to around $46, which may be more palatable to smaller retail investors. Moreover, a stock split signals that management is confident in the company's prospects, suggesting that growth may remain robust. There is ample reason for optimism in SMCI stock. Can Super Micro stock outperform AI pioneer Nvidia?

SMCI expects its revenue to grow nearly 90% in FY25 (the current fiscal year) to a level of about $28 billion, according to consensus forecasts, as data center-related spending remains strong and technology companies ramp up their AI and high-speed computing capabilities. AI models are increasingly multimodal, moving from just text processing to processing voice, images, video and 3D, which will require higher computing power, resulting in higher demand for servers and computing capacity. Although the server market is commoditizing, Super Micro has a competitive advantage: its products are considered more customizable and energy efficient than its competitors. Super Micro's customers may also opt for more premium products. For example, the company predicts that expensive liquid cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of the server racks it ships next year. The company is also steadily ramping up its production capacity. For example, the company is preparing to open a new facility in Malaysia that will be able to produce more than 5,000 racks of server kits per month. The company has seen its gross margins pressured a bit in recent quarters due to increased sales of its liquid cooling systems, which have proven expensive to produce, but that could eventually improve as it creates a more efficient supply chain for its servers.

At current share prices, Supermicro's stock is trading at about 21 times its one-year earnings and about 13.5 times its forward earnings. Is this a reasonable multiple? We believe so. We understand that ongoing compliance-related issues will weigh on the stock price. The stock price could more than double to $1,000.However, we provide the following counterexample. Why Supermicro's stock price could fall to around $200 per share.

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