On Aug. 6, in conjunction with the results of its fiscal 2024 fourth quarter (ended June 30), Super Micro Computer (NASDAQ: SMCI), also called Supermicro, announced plans to initiate a 10-for-1 stock split. When the split is complete, investors will receive nine additional shares for each share they own after the market close on Monday, Sept. 30. The stock will begin trading on a split-adjusted basis when the market opens on Tuesday, Oct. 1.
It’s easy to see why management embarked on this course. Supermicro stock has gained 60% over the past year and is up an incredible 1,520% over the past decade (as of this writing).
After gains of that magnitude, investors are left pondering the quintessential investing question: Is Supermicro a buy ahead of its highly publicized stock split? Let’s see what lessons we can glean from history.
An object in motion…
Long-time shareholders will note that Supermicro has never had a stock split in its 17 years as a public company, so there’s no track record to review. Fortunately, there are other resources we can use to provide insight into how Supermicro stock will fare.
Research conducted by analysts from Bank of America reveals that companies that split their shares delivered total returns of 25% in the 12 months following the conclusion of the split, compared to returns of just 12% for the S&P 500 index.
That isn’t to say it was the stock split that caused the higher gains, but rather the history of strong business and financial results that necessitated the stock split in the first place.
Investors can take lessons from other areas of study and apply them to investing. One of my favorites is Sir Isaac Newton’s first law of motion, which states that an object in motion tends to stay in motion unless acted upon by an outside force. Reframed in the context of investing, successful companies generally continue to be successful.
Is Supermicro stock a buy?
While it may be tempting to chase short-term gains, investors are left to ponder if Supermicro stock is a buy ahead of its high-profile stock split. A review of the company’s most recent results can help provide much-needed context.
In the company’s fiscal 2024 fourth quarter (ended June 30), Supermicro reported record revenue that soared 143% year over year to $5.31 billion, which also increased 38% quarter over quarter. This resulted in adjusted earnings per share (EPS) that jumped 78% to $6.25. While results of that magnitude would normally be cause for celebration, investors saw the glass as half full as profit margins took a hit.
During the earnings call, CEO Charles Liang suggested that the underperformance was caused by a shortage of specific server components, which resulted in $800 million in sales that shifted to the next quarter and impacted the product mix. He also noted that the production facility in Malaysia — which will come online later this year — will be “instrumental in increasing our profitability.” This suggests that Supermicro’s profit margins will rebound in the near future.
There’s more. Supermicro has a small but growing share of the AI server market. Bank of America analysts believe the company will increase its market share from 10% in 2023 to 17% by 2026. Keybanc Capital Markets analyst Thomas Blakey is even more bullish, forecasting a market share of 23% this year.
I’d be remiss if I didn’t address the elephant in the room. Supermicro was hit by a one-two punch of bad news this week. First, the company was the subject of a short report issued by Hindenburg Research, alleging accounting irregularities, undisclosed related-party transactions, and export control issues. The following day, Supermicro revealed that it would be late filing its annual report.
It’s important to note that the short report was long on allegations and short on evidence, according to analysts at JPMorgan, who maintained a buy rating and a $950 price target. The analysts note that most of the allegations are issues that are “existing and already known,” and the report is “largely void of details around alleged wrongdoings.” Hindenburg is short the stock and has a vested interest in seeing it fall, so until there’s evidence to the contrary, my money is still on Supermicro.
The company’s triple-digit growth and market-share gains suggest the stock has a long runway ahead.
Does AI have staying power?
One of the biggest debates on Wall Street is just how long this AI-fueled growth will continue. Bears suggest the writing is already on the wall, while bulls see additional upside for years or even decades.
There’s no agreement on the strength and duration of the secular tailwinds driving AI adoption. That said, the generative AI market is expected to add $2.6 trillion to $4.4 trillion to the worldwide economy over the next decade, according to research compiled by McKinsey & Company. These estimates have been growing over time, which suggests there may be additional upside revisions ahead.
Over the past five years, Supermicro stock has been on fire, as revenue has increased 564%, driving net income up 1,240%. This has driven the stock price up 2,750% during the same period (as of this writing), eclipsing the 89% gains of the S&P 500.
Despite that remarkable performance, Supermicro is still attractively priced, at just 2 times sales, the very definition of a bargain basement stock.
Add to that the company’s parabolic growth, market-share gains, and accelerating adoption of AI, and the path forward is clear: It doesn’t matter if you buy Supermicro stock before or after its stock split — as long as you buy it.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Super Micro Computer. The Motley Fool has positions in and recommends Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy.
Meet the Stock-Split Stock That Soared 1,520% Over the Past 10 Years. Is It a Buy Ahead of Its 10-for-1 Stock Split? was originally published by The Motley Fool
Source: finance.yahoo.com