What we think about Super Micro Computer (SMCI)
Super Micro Computer in Three Words: Modular Datacenter Servers
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Background
Supermicro’s modular architecture designs, assembles, and installs server solutions that optimize the performance efficiency and total cost of ownership for data centers. In non-nerd terms, they make computing and storage faster and cheaper by perfectly integrating chips, power, and cooling. Or even simpler, they make the internet run faster and with less power.
Its $5 billion in annual sales makes it the world’s third-largest server provider. Its 5% market share lags behind only Dell (17% share) and Hewlett-Packard Enterprise (14%) in an extremely fragmented market that has proven elusive in generating long-term profits.
Yet “servers” are not just a mishmash of components that are haphazardly thrown together; they’re actually perfectly-designed solutions that require engineering acumen. Just as a painter or an architect would pay close attention to the smallest detail of their work, Supermicro’s engineers configure server components with precision to match the application’s performance needs and reduce the overall cost of ownership.
Let’s take a few examples:
- If you want to upgrade your legacy datacenters that previously used Intel’s power-hungry Xeon CPUs to something more efficient, you might buy Supermicro’s H13 CloudDC systems that use AMD’s newest EPYC 4 processors.
- If you’re running AI training models and need performance even with massive datasets, consider the Next-Gen 8U system built around NVIDIA’s H100 GPUs. - If you’re building out a Metaverse and you need zero latency, how about the combination of NVIDIA’s RTX with a custom CPU.
All of these systems also include highly-customized software ecosystems, virtualized abstraction layers, networking, and power management as well. It’s kind of like combining the brains of Bill Gates, Jensen Huang, and Bill Nye the Science Guy together into the design of every system.
Supermicro has amassed 30 years of server know-how and is responsible for several unappreciated industry firsts. In the 1990s it was the first to introduce Intel’s Pentium Pro into the earliest generations of datacenters. In the 2000s, it was the first to introduce NVIDIA’s GPU processors into servers and unleash their parallel computing capabilities. In the 2010s it introduced AMD’s newest EPYC CPU processors and their beautifully designed Zen microarchitectures.
These server solutions are what introduce microprocessor innovation into the datacenter in a fast and optimized way. Supermicro’s engineers work directly with their counterparts at the chipmakers, allowing new products to be commercially-useful almost immediately. Best-in-class servers can easily cost $100,000 apiece and large customers can spend $100 million or more per year. But if you’re running a large data center, those upfront capital expenses are pocket change in comparison to the power consumption savings you will realize over time.
In the words of the company’s CEO Charles Liang:
"Customers don’t just care about the bill of materials costs – they care about the total cost of ownership. This takes into account performance, performance per watt, and especially quality and service."
That customer list includes Intel, NASA, the US Department of Defense, Lawrence Livermore, Apple, and Meta Platforms (to name a few). The company was founded in 1993 and is headquartered in San Jose, California.
Conviction Rating Changes:
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Supermicro was upgraded on February 25, 2025.
Supermicro has now officially filed Form 10-K for Fiscal 2024 and Forms 10-Q for the First and Second Quarters of Fiscal 2025.
With these filings, all outstanding financial statements are now up-to-date and with no restatements. The company has now regained compliance with the NASDAQ's requirements.
Restated Q1 2025 Quarterly Results
Restated Q2 2025 Quarterly Results
Recent Company Updates:
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February 11, 2025:
We've now received Supermicro's highly-anticipated "Business Update."
Here's the Cliff's Notes of the most important pieces:
- Lowered Fiscal 2025 Guidance: "The Company is updating its revenue guidance from a range of $26 billion to $30 billion to a new range of $23.5 billion to $25 billion."
- Strong Fiscal 2025 Guidance: "We anticipate this technology transition sets a strong foundation for us now, paving the way for $40 billion revenue in FY26."
- Updates to 2024 Annual Report: "Supermicro continues to work diligently toward the filing of its Annual Report. Based on information currently available, the Company believes it will make such filings by February 25, 2025.
- Why This is Taking So Long: "In late 2024, the Company received subpoenas from the Department of Justice and the Securities and Exchange Commission seeking certain documents following the publication of allegations in a short seller report which was published in August 2024. The Company is cooperating with these document requests.
- Minimal Impact to the Financials: "The charge for inventory reserves results from an unanticipated decline in the market value of certain components that were held in the Company’s inventory or on non-cancellable purchase orders at the end of fiscal year 2024. Collectively, these changes resulted in a downward adjustment to the previously announced preliminary unaudited fiscal year 2024 and fourth quarter of fiscal year 2024 GAAP and non-GAAP diluted net income per common share of approximately $0.09 based on post-split diluted shares outstanding.
- No Restatement Required: "The foregoing adjustments are to previously announced preliminary unaudited financial results and, as such, do not constitute a restatement."
- Update to the Q4 Results: "The adjustments recorded in the results for the fourth quarter of fiscal year 2024 include: an increase in net sales of approximately $46 million, an increase in cost of sales of approximately $96 million, and an increase in operating expenses of approximately $5 million."
My Overall Takeaway:
I'm not seeing any smoking guns here. The numbers have now been audited and it doesn't look like a ton of changes in revenue recognition.
Supermicro is currently growing its top line at 50% and its $40 billion guidance for Fiscal 2026 would represent 60%+ growth.
August 29, 2024: Supermicro's Fall From Grace is a Buying Opportunity. Here's Why I'm Increasing My Conviction in the Stock