Supermicro's Stock Takes a Dive Despite Promising Revenue Forecast and Stock Split

AI Bubble Continues to Deflate

Supermicro, a server manufacturer that has greatly benefited from the rise of artificial intelligence (AI) in the past two years, saw its shares swing wildly. The company's stock initially surged by 16% but then plummeted by over 10%. This came after Supermicro's Q2 earnings and revenue fell short of expectations. However, what really rattled Wall Street was the company's shrinking profit margins, which overshadowed its optimistic sales forecast and the announcement of a 10-1 reverse stock split.

Q2 Performance and Profit Margin Concerns

For Q2, Supermicro reported revenues of $5.31 billion, slightly missing the average estimate of $5.32 billion. Adjusted EPS also fell to $6.25, a significant drop from the company's own previous forecast and the $8.25 average analyst estimate. The most alarming aspect of the report was the drastic decrease in profit margin, which fell by 580bps YoY (and 430bps QoQ) to a mere 11.3%. This is largely due to a fierce price war with competitors such as Dell and Hewlett Packard. The company's cash burn of $635 million - marking the third consecutive quarter of negative cash from operations - added to the concerns.

Wall Street Remains Unconvinced

Despite Supermicro attributing the drop in margins to changes in customer and product mix and investments in talent and research & development, Wall Street remained skeptical. This skepticism was reflected in the stock market, where Supermicro's shares fell to their lowest level this year. Even the company's optimistic outlook for 2025, which forecasted full-year revenue between $26 and $30BN against Wall Street estimates of $23.6BN, and the announcement of a 10-for-1 stock split after October 1, failed to inspire investor confidence. Instead, it seems to have spurred selling, as investors grow increasingly concerned about the long-term profitability of AI-optimized servers sold by companies like Supermicro, Dell Technologies, and Hewlett Packard Enterprise.

Supermicro's Future Outlook

Supermicro, based in San Jose, California, has seen a surge in sales due to the increasing demand for equipment that powers AI training and applications. "We are well-positioned to become the largest IT infrastructure company," CEO Charles Liang stated. However, the market's reaction to the company's Q2 report suggests that investors are not convinced. Despite the company's shares doubling in value this year and being added to the S&P 500 and Nasdaq 100 indexes, the stock has declined about 48% from a peak in March.

Bottom Line

Supermicro's recent performance raises questions about the sustainability of the AI bubble and the long-term profitability of companies operating within this sector. Despite optimistic revenue forecasts and strategic moves like stock splits, the market's reaction suggests a degree of skepticism and concern. What do you think about this situation? Do you believe in the long-term profitability of AI-optimized servers? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.