Supermicro still has a fantastic long-term earnings and stock performance track record.
Stock splits have been a major part of market activity this year, with high-profile names like Nvidia and Walmart launching such operations. And, as you can see from my examples, they’ve spanned industries from technology to retail and beyond.
Why do investors get so excited about stock splits? Well, they lower the per-share prices of often high-flying and popular players, making it easier for a broader range of investors to get in on these stocks. And a stock split often can be viewed as a positive sign from management, suggesting belief in the ability of the stock to soar once again. Though, keep in mind that a stock split does not change the value of a stock or of any individual’s holdings. You end up with more shares at a lower price.
Investors have gotten excited about stock splits this year, and in many cases, this has helped drive these particular stocks higher from the announcement date to the actual split. For example, Nvidia soared almost 30% during that period. But one stock in particular has been an exception, and that’s the one involved in the market’s next big stock split, set for Sept. 30. I’m talking about Super Micro Computer (SMCI 4.31%). The stock fell in recent weeks due to a short-seller’s report alleging troubles at the company and extended losses late this week on a press report of a possible Justice Department probe. What direction will this top artificial intelligence (AI) stock take after its stock split? Let’s look for some answers.
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Supermicro’s earnings and share performance
First, let’s take a look at Supermicro’s recent and longer-term performance as well as the earnings picture. This 30-year-old company progressively built its business over time, but growth only took off in recent years as the AI boom gathered momentum. Supermicro makes workstations, servers, and other products necessary for AI data centers — and the company tailors them to the needs of each customer.
This has helped Supermicro’s earnings to explode higher over the past few years, with quarterly revenue in late 2023 surpassing annual revenue from as recently as in 2021. And there’s reason to be optimistic about Supermicro’s earnings moving forward. The company continues to operate in the high-growth market of AI, which is expected to climb from $200 billion today to more than $1 trillion by the end of the decade. On top of this, Supermicro has taken steps to increase volume and decrease costs, with this being the focus of a new factory in Malaysia set to open later this year.
All of this has helped Supermicro’s shares soar over time — gaining 2,200% over the past five years. And in the first half of this year, Supermicro even outperformed market darling Nvidia when it climbed 188%.
So why the more than 30% decline from the announcement of Supermicro’s stock split in early August until now? Three items in particular have weighed on the stock. First, an Aug. 27 report from short-seller Hindenburg Research alleging troubles at the company such as “accounting red flags” hurt investor sentiment. Short-sellers make money when a stock they are short on falls, so Hindenburg’s report has to be taken with some skepticism. However, the day after Hindenburg released its report, Supermicro announced it had delayed the filing of its 10-K annual report, and this worried investors about potential changes to earnings figures.
In a Sept. 3 letter, the company reminded people that “when we announced the decision to delay our Annual Report filing, we indicated that based on the work done so far, we don’t anticipate any material changes in our fourth quarter or fiscal year 2024 financial results.” And it stated that the short-seller’s report “contains false or inaccurate statements.”
Adding to the company’s woes, just this week, The Wall Street Journal, citing unnamed people familiar with the matter, said the Justice Department is probing Supermicro. A prosecutor from the U.S. Attorney’s office in San Francisco contacted people who may have relevant information, and the probe is in the early stages, the newspaper reported.
Supermicro addresses the short report
Now let’s back up a bit. Earlier this month, Supermicro discussed the short report, calling statements in it “false or inaccurate.” The company also said it would fully address the Hindenburg statements “in due course.” And regarding the annual report delay, Supermicro said it didn’t expect any significant changes to earnings.
It’s also important to consider that Hindenburg holds a short position in Supermicro, meaning it benefits from declines in the stock. In short-selling, investors borrow shares to sell, then must repurchase them — ideally at a lower price — to return to their original owner. As a result, Hindenburg has a bias toward Supermicro shares falling, and this makes it difficult to rely on Hindenburg as a source of information. Finally, a Justice Department probe hasn’t been confirmed, but if a probe is confirmed at any point, this wouldn’t automatically indicate wrongdoing. Investors should also keep in mind that the Justice Department has been vigilant regarding technology companies and has launched probes into others for various reasons.
Now let’s consider potential Supermicro performance after its stock split — but not just over a few days, and instead over about a year. A study of stocks from 1980 through today shows that generally stocks that have split outperform the S&P 500 from the date of their split announcement through the 12 months to follow. These stocks have delivered an average total return of more than 25%, more than twice the S&P 500 average return, Statista reports, citing Bank of America data. So, history shows us Supermicro could soar in the year following its upcoming stock split.
Is history always right?
Of course, it’s important to keep in mind that history isn’t always right. There are occasions when individual stocks or the market don’t follow historical patterns. It’s impossible to predict stock performance with 100% accuracy, especially in the short term, and a year is a short term for investors. And in the case of Supermicro, news regarding a possible probe could impact the shares at least until there is more clarity on the issues.
So what should investors do? If you’re a Supermicro shareholder, it’s best not to panic-sell. From the information we know today, the company’s future looks bright. Demand for its products is strong, and interest in the company’s direct liquid cooling (DLC) technology to tackle the problem of heat in AI data centers could offer a new wave of growth ahead. Even if Supermicro’s shares suffer in the near term, they could climb significantly over a period of five years or more.
But what if you haven’t yet invested in Supermicro? Considering the latest news, it’s probably best to wait for more information from the company and possibly the Justice Department before making any moves — that way, you’ll have more visibility and will be more comfortable with your investment decision.
