Super Micro's 10:1 split could boost share price

Super Micro Computer (NASDAQ: SMCI) stock has seen significant volatility this year, although a potential upswing may be on the horizon with the company's upcoming 1-for-10 stock split. SMCI stock has risen nearly eightfold over the past two years — from about $60 per share in September 2022 to levels around $460 today, led by strong demand for servers from AI data centers. However, the stock experienced a significant decline earlier this year due to gross margin concerns, supply chain issues, and a delayed 10-K filing following short seller Hindenburg Research's allegations of accounting irregularities. As the stock now prepares for split-adjusted trading starting October 1, interest in Super Micro shares may be on the rise again.

SMCI stock has delivered better returns than the broader market in each of the past three years. The stock's returns were 39% in 2021, 87% in 2022 and 246% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as shown by the HQ portfolio's performance metrics. So how will the impending split affect SMCI stock?

Although splits don't change a company's fundamental outlook, they often trigger a share price increase after the announcement. We saw this with Nvidia's recent split and Tesla's first stock split in 2020. Additionally, stocks tend to perform better after a split for two reasons: they make them accessible to retail investors and they drive up demand and trading volume. In Super Micro's case, the price of a single share would fall from its current $460 to about $46, and that might be a more acceptable amount for smaller retail investors. Additionally, splits signal that management is confident in the company's prospects, suggesting growth could remain strong. There's plenty of reason for optimism in SMCI stock. Can Super Micro stock outperform AI frontrunner Nvidia?

SMCI is expected to grow its revenue by nearly 90% to about $28 billion in FY25 (the current fiscal year), according to consensus estimates, as data center spending remains high and technology companies increase their AI and accelerated computing capacity. AI models are becoming increasingly multimodal, moving from pure text processing to working with voice, images, videos, and 3D, requiring higher processing power and, consequently, higher demand for servers and computing capacity. Although the server market is commoditized, Super Micro has some competitive advantages as its products are considered more customizable and energy efficient than its competitors. Super Micro's customers are also likely to opt for more premium products. For example, the company estimates that expensive liquid cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of the server racks it ships next year. The company is also continuously increasing its production capacity. For example, it is preparing to open a new facility in Malaysia that can produce over 5,000 racks of server kits each month. While the company's gross margins have come under some pressure in recent quarters as it sells a larger share of liquid cooling systems, which are expensive to manufacture, they could start to improve as it builds a more efficient supply chain for its servers.

Super Micro stock trades at 21x trailing earnings and 13.5x forward earnings at current price levels. Is that a reasonable multiple? We believe it is. While we note that the ongoing compliance-related matters are an overhang on the stock, there is potential for the stock to rise more than 2x to $1,000. On the other hand, we present a counterexample that outlines how Super Micro stock could fall to levels around $200 per share.

While investors hope for a soft landing for the U.S. economy, the question is how bad things can get if another recession hits. Our How Low Can Stocks Fall During a Market Crash dashboard tracks how major stocks performed during and after the last six Market crashes.

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