I should start by saying once more that there have been few stocks I’ve been so wrong about as SMCI. I heard about it from a relative before the stock exploded upward, looked at the website (which is not the world’s best) and thought–it’s an assembler of machines for AI. My emphasis was on assembler. What I failed to appreciate was that SMCI was more or less the only place people could get the most advanced NVDA chips in a box designed to optimize their effectiveness. It was around $100/share back then.
Two months ago, it was at ~$1200. Earnings had exploded and SMCI was trading at a 40x multiple on trailing earnings, or 4x what it was trading at back then.
The stock was ~$1000 a couple of weeks ago and is at ~$727 as I’m writing this.
What’s going on?
–remember who’s writing this
–there have been reports recently that NVDA working with other vendors to supply NVDA chip-optimizing computers. This will presumably sooner or later introduce more price competition
–SMCI reported March quarter results the other day. There’s no 10-Q available yet (which I find odd), but there is an income statement on the company website.
SMCI performance, as I read it, has been driven by its high degree of operating leverage, during a period when sales have increased dramatically and the gross margin has expanded. In the March quarter, however, the gross margin (meaning the markup over cost of goods) contracted. My guess would be that the company is receiving more large orders from big AI players who are able to negotiate discounts. In any event, the market is taking this that of the two drivers of recent earnings gains–sharp sales increases and gross margin expansion–that latter has exhausted itself.
Hard to know where in the reassessment process we are now.
It’s always interesting when a company can lose 20% in a day A company worth billions.
I guess the market gurus got advanced warning of a fire?
I also love when after every market. Lose the gurus explain what happened, ignoring what the same gurus said the day before.
Just a cynic
Thanks for your comment.
My sense is that a lot of today’s short-term trading is computer-based, using algorithms that don’t take the balance sheet and income statement specifics of each case deeply into account. So I find it very hard to interpret.
As to SMCI, the contraction in March quarter gross margin seems to me to be being read at the very least as putting a ceiling on the rate of future earnings growth, at worst a sign that growth is just about to start decelerating. The potential worry would be that the growth rate in coming quarters, whatever it is, while likely very good vs. the market, won’t be strong enough to support a premium 40x PE multiple. I don’t know SMCI well enough to have an opinion, but the quarterly results, while very strong, don’t inspire me to do the research I’d need to be a buyer. Yes, Nvidia, which I hold, is trading at 70x, a much higher multiple. On the other hand, it’s in a much stronger position, It owns the bulk of the intellectual property here–and the engineering talent to develop more.