Super Micro Projected a Huge Revenue Forecast. Here’s Why That’s Not Enough.

Super Micro Computer Inc. anticipates its revenue could double in the upcoming fiscal year, following an already impressive doubling in the previous year. While such a forecast of substantial growth, driven by high demand for artificial intelligence (AI), might be a dream scenario for many investors, it hasn't been enough to please Wall Street. The company's stock has plummeted over 14% in premarket trading.

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Mizuho desk-based analyst Jordan Klein remarked, “High top-line growth is one thing, but if it comes with or is associated with margin pressures, the investor reaction is rarely, if ever, positive.” The concern among investors is that Super Micro, along with competitors like Dell Technologies Inc., may be perceived as "lower-quality growth stories."

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Susquehanna analyst Mehdi Hosseini observed an intensifying cash burn at Super Micro in the most recent quarter. He questions whether the company will continue to deplete cash rapidly while striving to meet its ambitious revenue target, which implies a potential 75% to 100% increase in the top line for the new fiscal year. Hosseini specifically queried whether Super Micro would need to spend another $2 billion or more in free cash flow to achieve this revenue growth.

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Hosseini noted that while Super Micro is effectively "mass customizing" AI server and rack solutions, this business model demands substantial working capital and capital expenditures to expand capacity. He also pointed out that the competitive landscape is fierce and that liquid cooling, a critical component of Super Micro’s offerings, carries lower-than-expected gross margins. Consequently, Hosseini has a negative rating on the stock with a target price of $325.

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Super Micro's liquid-cooling solutions are particularly relevant for the AI era, given the substantial power requirements of AI technology. However, Rosenblatt Securities analyst Hans Mosesmann highlighted a concern among some investors: the company's management has decided not to sell direct liquid cooling at premium prices, opting instead to pursue strategic opportunities in the secular hyperscale market.

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Despite this, Mosesmann remains positive about Super Micro, noting that the company commands a remarkable 70% to 80% share of the global direct-liquid-cooling market. He sees AI trends as a significant advantage for Super Micro, which benefits from its building-block architecture, green computing, rapid platform deployment, and essential liquid cooling capabilities. Mosesmann maintains a buy rating on the stock with a target price of $1,300.

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JPMorgan’s Samik Chatterjee also maintains a positive outlook. He acknowledges that the initial investor reaction to Super Micro's earnings report may focus on the significantly softer gross margin, even though investors were already expecting a margin rate below the long-term average of 14%-17%. Despite this, Chatterjee sees "multiple positives" for the company moving forward. He expects gross margins to improve and believes Super Micro will overcome its peak inefficiencies. Chatterjee admits that Super Micro "will be a show-me story on margin improvement" but retains his overweight rating with a target price of $950, contingent on stronger execution on margins.

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In summary, while Super Micro Computer Inc. is positioned for potentially significant revenue growth driven by AI demand, concerns about cash burn, margin pressures, and competitive challenges have led to a cautious investor response. Analysts have mixed views, with some emphasizing the need for better margin management and others highlighting the company's strong market position and strategic opportunities.

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