In This Article:
Key Points
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Super Micro Computer's business grew its sales by 19% last quarter, but its gross profit declined.
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The company's gross margins have fallen to less than 10%, which can make it difficult to grow its bottom line.
Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, has been in the doghouse with investors over the past year. There have been concerns around its financials and the reliability of its numbers after its auditor quit, and there were even worries that it may get delisted for being late filing its quarterly and annual reports.
Thankfully, the company no longer seems to be facing that risk. But that doesn't mean the tech stock is a risk-free investment by any means. In fact, the one problem that I saw as being the biggest reason to avoid the stock still remains a concern, and until it's fixed, I wouldn't be surprised if growth investors remain on the sidelines.
The company's gross margins are atrocious
One of the most important numbers investors should consider when looking at a stock is its gross profit margin. This tells you how much of every dollar of revenue is left after cost of goods sold, to help the business cover its overhead and other operating expenses. A low gross margin can work if a company does significant volume, but it's not easy.
A low gross margin has been a problem I noted with Supermicro in the past, and unfortunately, it not only didn't improve but has gotten worse.
Supermicro's margins have been trending down for over a year. This is a problem because while the company is growing its top line, it isn't necessarily making strides toward profitability.
What stuck out to me in the company's most recent earnings report was that while net sales of $4.6 billion were up 19% year over year, thanks to strong demand for its storage and server solutions, the company's gross profit actually declined by 26%, to $440 million. The reason is that the company's gross profit margin fell considerably, from more than 15% to less than 10%. The increase in revenue was more than offset by a worsening margin.
Supermicro's earnings are going in the wrong direction
This past quarter, Supermicro's quarterly net income totaled less than $109 million -- its lowest level since 2023. While earnings can fluctuate from one period to the next, it's a troubling trend nonetheless for the business.
The danger is if the company's profits don't improve, that could make it a more expensive buy. And that could be the case if it isn't able to strengthen its gross margins.