On April 19, Supermicro Computer (SMCI. US) is a "Black Friday". As the company is about to announce its fiscal third quarter results on April 30, but does not provide an initial earnings forecast as usual, this red flag has triggered investors to reduce their holdings of the stock, dragging down Nvidia, Arm, AMD and other technology stocks together.
Since the beginning of this year, Supermicro's stock price has risen from a peak of $280 at the beginning of the year to more than $1,200, and even AI chip giant Nvidia is far from being able to rise like a rocket. But now, as more and more investors begin to question how much bubble and hype exists in the AI industry, supermicrocomputers seem to have reached a dangerous crossroads.
Performance growth has repeatedly exceeded expectations, but there are doubts about the real technical strength?
According to Zhitong Financial APP, Supermicro Computer focuses on high-performance servers, including servers, storage systems, network switches and software, which are used for website servers, data storage and AI training and other businesses, and is one of the top three server manufacturers in the world.
Recently, the strong performance of Supermicro Computer is mainly due to the high demand for AI servers. From FY2019 to FY2023, Supermicro recorded a CAGR of 19.4% in revenue and 72.7% in net profit. Among them, the performance in fiscal year 2022 and fiscal year 2023 has accelerated significantly, with revenue growth rates of 46.06% and 37.09% respectively, and net profit growth rates of 154.92% and 124.43% respectively.
According to the latest financial report, the company's revenue for the second fiscal quarter of 2024 (the fourth quarter of the calendar year 2023) was $3.66 billion, a year-on-year increase of 17%, and adjusted earnings per share were $5.59, significantly exceeding analysts' previous estimates.
But behind the gratifying performance, it is worth mentioning that compared with the chip leader NVIDIA, the server business of ultra-micro computer actually has a low technical threshold, and the gross profit margin of the business is far lower than that of NVIDIA. In fiscal 2024, the company's gross profit margin was 15.5%, down 3.2 percentage points year-on-year and 1.2 percentage points quarter-on-quarter.
As a low-end manufacturing company, the reason why Supermicrocomputer's performance and stock price performance can both surpass Nvidia are actually mostly due to "private factors" outside the data level.
It is understood that Liang Jianhou, the founder of Supermicrocomputer, and Huang Jenxun, the founder of Nvidia, were also born in Taiwan, China, and thanks to the personal friendship of the two founders, Supermicrocomputer and Nvidia have had a cooperative relationship for more than 20 years. When NVIDIA developed AI GPUs, Supermicro Computer also provided hardware support, so after Nvidia officially launched AI chips, Supermicro Computer can always follow up in time and provide customers with server products with a variety of GPU specifications. There are even market rumors that Supermicro Computer has the "priority" to get Nvidia chips among many server manufacturers, which undoubtedly ensures that Supermicro Computer fully benefits from this wave of AI dividends.
However, on the other side of this extraordinary "friendship", Supermicrocomputer's strong dependence on Nvidia is self-evident. From a business perspective, the low-end manufacturing industry to which Supermicro Computer belongs is highly substitutable, has many strong competitors in the server field, and its performance is prone to fluctuations with upstream and downstream changes.
According to the 2023 Global AI Server Market Share Report released by TrendForce, Inspur currently ranks first in the AI server market share, followed by Dell and HPE. It can be seen that supermicrocomputer does not occupy much of a leading position in market share.
In the latest study, TrendForce predicts that global server shipments are expected to be about 13.654 million units in 2024, with an annual growth rate of 2.05%, of which AI servers account for about 12.1%. The agency pointed out that in 2024, supermicro computer's server shipments are expected to be flat, and AI server shipments have the opportunity to double, but general-purpose servers have not rebounded significantly, which will drag down performance to a certain extent.
From the perspective of segmented business revenue in Q2 of fiscal year 2024, the current revenue of supermicro computer's server and storage system products accounts for 94%, and the revenue of subsystem and accessory products accounts for 6%; The OEM equipment and large data center market revenue was $2.15 billion, or 59%, the fastest-growing market, while the enterprise and channel market revenue was $1.48 billion, or 40%, and the 5G, telecom and edge/IoT market revenue was only $35 million, or 1%.
Looking ahead, Supermicro raised its revenue forecast for fiscal 2024, expecting sales to be in the range of $14.3 billion to $14.7 billion by fiscal 2024 (ending June this year), well above its previous forecast of $10 billion to $11 billion.
At present, the capacity utilization rate of ultra-micro computers is mainly limited by the supply of NVIDIA chips. As various technology giants have entered the market, the shortage of AI chips and Nvidia chips has eased, and the performance of supermicro computers has room for further growth.
According to Zhitong Financial APP, in order to ensure future production capacity, Supermicro Computer has begun to add two new factories near Silicon Valley and build a new Malaysian factory, with an estimated annual production capacity of more than 25 billion US dollars in the future; In addition, the company is also building 100KW to 120KW racks with liquid cooling capacity, and the production capacity will reach 1,500 units per month by Q4 of FY2024.
At the same time, it cannot be ignored that the company's profit margin may be further compressed by fierce market competition, and the label of low-end manufacturing also makes investors tend to hold it for a short time, and the possibility of stock prices soaring and plummeting in a short period of time is not small.
Investment banks warn of stock price bubbles, and the AI industry may be cold this year?
If you look at the stock price of Supermicro Computer this year, you will find that there have been big ups and downs, as early as mid-February, it experienced a sharp drop of about 20%, and on April 19, it fell 23.14% to close at $713.65, which has fallen more than 40% in 2 months from the high of $1229 in early March.
Comparing the turnover rate of Supermicro Computer and Nvidia, it will be found that the turnover rate of Supermicro Computer is mostly above 20%, and the turnover rate of the latter basically fluctuates between 1-3%, which is essentially the essence behind the current high stock price of Supermicro Computer is mainly supported by the short-term positive support of performance and AI prospects, and most investors prefer to cash out at a high level rather than hold it for a long time.
However, not everyone is always optimistic about the future of AI. In October 2023, CCS Insight, an analyst firm, pointed out that generative AI could be cold in 2024 as "the hype around AI technology itself gradually wanes", "the cost of running AI continues to rise", and calls for "AI regulation" increase.
In Goldman Sachs' "Top of Mind" report, Gary Marcus, CEO and founder of startup Robust.AI, pointed out that "current AI is far from intelligent enough" and that humanity is still far from the goal of artificial general intelligence (AGI);
Morgan Stanley also directly warned about the AI boom in the secondary market 8 months ago, saying that according to the historical background, Nvidia's stock price surge is in the "late" stage, which may indicate that the bull market has peaked and the "bubble" of the artificial intelligence industry is about to burst.
On April 19, the sharp drop in the stock prices of Supermicro Computer and Nvidia drove a number of U.S. technology stocks lower, which is a concentrated reflection of the market's concerns about a potential bubble in the AI field. At the macro level, geopolitical tensions and weakening expectations of the Federal Reserve's interest rate cut have led to market funds shifting to more safe-haven precious metals and blue chips. At the micro level, the decline in the performance of the first quarter of ASML2024 exceeded market expectations and TSMC's downward revision of its full-year performance guidance seem to indicate that the progress of the industry in 2024 may not be as "good" as imagined.
For Supermicro Computer, although it is backed by the big tree of NVIDIA, the follow-up performance growth has a lot of certainty, but if it can't tear off the label of manufacturing OEM, no matter how high the stock price is, it will only be a flash in the pan. How to improve their competitiveness and reverse investors' perception will become a proposition that the company's management needs to think about urgently.