On Aug. 6, in conjunction with the results of its fiscal 2024 fourth quarter (ended June 30), Super Micro Computer (NASDAQ: SMCI), commonly called Supermicro, announced plans to initiate a 10-for-1 stock split. As a result of the split, shareholders will receive nine additional shares for each share of common stock they already own. The split will be conducted after the market closes on Monday, Sept. 30. The stock will begin trading on a split-adjusted basis on Tuesday, Oct. 1.
Stock splits tend to generate a lot of buzz among investors, and Supermicro is no different. Furthermore, the company’s robust performance over the past couple of years has fueled an eye-popping surge in the share price, as the stock has gained 433% since early last year (as of this writing).
After gains of that magnitude, investors are left to consider the question: Is Supermicro stock a buy ahead of its high-profile stock split? Let’s see what history has to say.
An object in motion tends to stay in motion
Market historians will note this is the first time Supermicro has initiated a stock split in its 17 year stint as a public company, so there’s no track record to review. Fortunately, there are other resources investors can use to provide insight into how Supermicro stock might perform post-split.
Research conducted by analysts from Bank of America revealed that companies that initiated stock splits generated returns of 25% in the 12 months after the stock split was announced, compared to returns of just 12% for the broader index, as represented by the S&P 500.
To be clear, the catalyst for the additional gains wasn’t the stock split itself but rather the strong business and financial results that precipitated the stock split.
Investors can learn valuable lessons from other fields of study, and one seems particularly fitting. Sir Isaac Newton’s first law of motion states that an object in motion tends to stay in motion unless acted upon by an outside force. In other words (and when applied to investing and stock splits), winners tend to keep winning.
By the numbers
While there is certainly the potential for short-term gains over the next year or so, long-term investors will still want to know whether Supermicro stock is a buy ahead of its high-profile stock split. A review of the company’s recent results can be instructional.
In its fiscal 2024 fourth quarter (ended June 30), Supermicro reported record revenue that soared 143% year over year to $5.31 billion while also increasing 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 were concerned about the company’s lower-than-expected profit margin.
In prepared remarks, CEO Charles Liang said this resulted from “the higher mix of hyperscale data center business and expedited costs of our direct liquid cooling (DLC) components in June and September quarters.”
He also noted a shortage of “key new components” that pushed $800 million in revenue into the following quarter. Finally, Liang said Supermicro’s “dominating position in DLC” and the production facility in Malaysia coming online later this year will be “instrumental in increasing our profitability.” This suggests any margin pressures will be short-lived.
For the company’s fiscal 2025 first quarter, management is guiding for revenue in a range of $6 billion to $7 billion, which would represent year-over-year growth of about 206%. The company is also forecasting adjusted EPS growth of 118% at the midpoint of its guidance.
Management clearly expects Supermicro’s growth spurt to continue.
I’d be remiss if I didn’t address the elephant in the room. The general weakness in artificial intelligence (AI) stocks of late, the aforementioned decline in its profit margin, and largely unfounded allegations by a short-seller have combined to weigh on Supermicro’s share price, currently down 63% from its peak. Investors abhor uncertainty, which explains the rampant selling. However, given the company’s continued strong performance, I’d respectfully submit the selling is overdone.
Is Supermicro a buy?
It’s still early innings for generative AI, which is the driving force behind Supermicro’s recent fortunes. According to Expert Market Research, the global AI market was estimated at $2.4 trillion in 2023 and is expected to soar more than 12-fold to $30.1 trillion by 2032, representing a compound annual growth rate of 32%.
If Supermicro continues to dominate the high-end server market, it will be well positioned to grab its share of the ongoing AI windfall. Furthermore, at just 22 times earnings and less than 2 times sales, Supermicro is attractively priced, particularly in light of the significant opportunity currently unfolding.
Given the available evidence, Super Micro Computer is a buy. And given the sizable opportunity and discounted price, I would submit that now is as good a time as any.
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Bank of America 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. The Motley Fool has a disclosure policy.
Should You Buy Super Micro Computer Stock Ahead of Its High-Profile 10-for-1 Stock Split? Here’s What History Shows. was originally published by The Motley Fool
Source: finance.yahoo.com