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Supermicro (SMCI), a prominent player in the GPU-as-a-Service arena and a leading supplier of liquid-cooled AI server racks, is facing a number of headwinds, including doubts around its internal control mechanisms, an ever more competitive landscape, and the gradual erosion of its liquid-cooling tech moat.
Now, Bank of America (BofA) analyst, Ruplu Bhattacharya, has resumed his coverage of Supermicro shares, albeit from a bearish angle, pegging an 'Underperform' rating and a stock price target of $35, which corresponds to a downside potential of around 28 percent relative to the current price level of $48.69.
Bhattacharya has identified 5 major bearish catalysts for Supermicro shares:
- The company's margins are likely to remain under pressure in the near-term due to elevated inventory levels of older-gen products, with an ever more competitive landscape continuing to act as a margin dampener over longer time horizons.
- Revenue growth remains limited by the availability of GPUs and key liquid-cooling tech components.
- Dell and HP, as major competitors of Supermicro in the AI server sphere, continue to leverage their enterprise customers for a proverbial leg-up.
- Supermicro faces intrinsic risks from pending investigations and litigations, as well as its relatively weaker internal control structure.
- Critically, Supermicro's key differentiator - its liquid-cooling tech - is likely to get "commoditized" over time, allowing its competitors to close the prevailing technological gap.
As such, Bhattacharya now expects Supermicro's gross margin to decline from 11.3 percent in FY 2025 to 9.4 percent by FY 2027.
Meanwhile, as we noted last month, Supermicro has now raised around $2 billion by offering its convertible senior notes to eligible investors.
Also, Supermicro recently inked a "multi-year partnership agreement" with DataVolt, a leading Saudi data center company.
According to Goldman Sachs, the deal could feasibly entail $5 billion in annual revenue and an annual EBIT of around $200 million for Supermicro, based on an assumed contract period of 5 years and a built-in margin of around 5 percent.
As of the time of writing, Supermicro shares are down a little over 1 percent in today's pre-market trading session. Over the past month or so, the stock is up just around 14 percent. And, these gains increase to 63 percent when one looks at the stock's year-to-date time frame.
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