SMCI Plunges 25.6% Post Q4 Earnings: Should You Hold or Fold the Stock?

Super Micro Computer SMCI stock has lost 25.6% following its lower-than-expected fourth-quarter fiscal 2025 earnings. Super Micro Computer reported fourth-quarter fiscal 2025 non-GAAP earnings of 41 cents per share, which missed the Zacks Consensus Estimate by 6.8%.

Super Micro Computer, Inc. Price and Consensus

Super Micro Computer, Inc. price-consensus-chart | Super Micro Computer, Inc. Quote

SMCI stock has also been highly volatile in the past year. However, the recent decline in the stock price has made it undervalued compared to the Zacks Computer- Storage Devices industry. At present, SMCI stock trades at a forward 12 months P/E ratio of 19.2X, which is lower than the 25.08X of the Zacks Computer- Storage Devices industry’s ratio of 18.59X.

SMCI Forward 12 Month (P/E) Valuation Chart

SMCI Faces Growing Competition

Rising competition from the leading companies in the storage and server space, such as Pure Storage PSTG, Dell Technologies DELL and Hewlett Packard Enterprise HPE, is a concern for investors.

In the storage space, Pure Storage offers a range of modern storage solutions through its offerings like FlashArray, FlashBlade and Pure Cloud Block Store to serve the purpose of providing All-Flash performance, cloud integration, AI and simplified management.

In the AI-optimized server space, Dell Technologies is a strong competitor. In the first quarter of fiscal 2026, DELL announced that it had received orders worth $12.1 billion for its AI servers, which has surmounted to become $14.4 billion in AI backlogs.

Hewlett Packard Enterprise also offers a range of server services, including HPE ProLiant, HPE Synergy, HPE BladeSystem and HPE Moonshot servers. In the second quarter of fiscal 2025, Hewlett Packard Enterprise’s server segment sales grew 6% year over year due to strong demand for its AI servers.

Margin Compression Hurts SMCI

SMCI is facing margin contraction due to the growing price competition from established competitors. Furthermore, price adjustments from its clients as they are second-guessing their shift from older to newer platforms like Blackwell are also weighing on SMCI’s margins.

Delayed purchasing decisions from customers as they are evaluating the adoption of next-generation AI platforms are also hurting SMCI in the near term. SMCI’s gross margin has been moving inconsistently for the past several quarters, with a declining trend. In the fourth quarter of fiscal 2025, SMCI’s non-GAAP gross margin contracted 70 basis points year over year.

Moreover, Super Micro Computer’s margins are facing pressure from high inventory reserves for older-generation products. Competitive pricing strategy to boost its DLC AI GPU cluster adoption has shot up the costs, resulting in margin contraction.

Additionally, higher upfront costs associated with ramping up production for its DLC technology are weighing on Super Micro Computer’s gross margin. The Zacks Consensus Estimates for the company’s first-quarter fiscal 2026 earnings is pegged at 47 cents, indicating a year-over-year decline of 37.3%. However, not everything is gloom and doom for SMCI.

SMCI’s Long-Term Prospects Look Bright

Despite its recent troubles, Super Micro Computer’s long-term growth prospects remain intact. The company has been a leader in providing high-performance server solutions, particularly for data centers that support AI and other advanced technologies.

The global demand for AI-driven solutions continues to rise, and Super Micro Computer's role as a builder of data center infrastructure positions it well to benefit from this trend. Moreover, Super Micro Computer’s reputation for designing and delivering energy-efficient, high-performance server systems has not been entirely overshadowed by recent events.

The company’s expertise in integrating advanced graphics processing units from major tech players like Nvidia is a strategic advantage as enterprises scale their data centers to accommodate next-generation computing needs. This foundational strength suggests that Super Micro Computer is poised to bounce back once it resolves its current issues.

Conclusion: Hold SMCI Stock for Now

Although SMCI faces near-term challenges from growing competition, contracting margins and delayed orders due to macroeconomic headwinds, the company’s long-term prospects are bright. Its AI-driven solutions, DCBBS and direct liquid cooling offerings are in high demand from its customers.

Currently, SMCI carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research