Artificial intelligence (AI) server manufacturer Super Micro Computer (NASDAQ: SMCI) regained compliance with the Nasdaq exchange earlier this year by filing its outstanding quarterly and annual financial reports. The company delayed filing its annual 10-K report last year due to issues with internal controls. This type of delay is never good news for investors, but Supermicro was able to remove a big cloud hanging over the stock.
Unfortunately, the company now has a new problem. Supermicro reported preliminary results for its fiscal third quarter on Tuesday, and the figures were a gut punch for investors. The company slashed its revenue outlook to a range of $4.5 billion to $4.6 billion, down from prior guidance of $5 billion to $6 billion. Adjusted earnings per share also got a haircut, with a new guidance range of $0.29 to $0.31, landing well below the previous range of $0.46 to $0.62.
Customer delays and inventory write-downs
Supermicro didn't provide many details with its preliminary results, but it did say some customers delayed purchasing decisions in the third quarter. Those delays pushed sales back into the fourth quarter, leading to a revenue shortfall.
The company also disclosed that its gross margin would be about 220 basis points lower in the third quarter compared to the second quarter. The decline is driven by higher inventory reserves -- essentially writing off inventory that will either never sell or will sell at a big discount -- and costs related to expediting new products.
One silver lining is that Supermicro claims that design wins for newer products are robust. However, the company provided no hard numbers to back that up. Supermicro also didn't provide a date for its full third-quarter results.
The wheels could be coming off the AI infrastructure market
Generative AI has real use cases. The trillion-dollar question, though, is whether the technology has enough use cases, and can generate enough revenue or cost savings for businesses, to justify the massive AI data center investments being made around the world.
Earlier this year, Microsoft laid out a plan to spend $80 billion this year on AI data centers. The Stargate Project, a collaboration between OpenAI and other companies, intends to invest $500 billion over the next four years to build AI infrastructure. Other U.S. tech giants, including Amazon and Meta Platforms, are pouring tens of billions of dollars into AI data centers as well. The net result is an explosion of planned spending that would keep demand for AI accelerators and AI servers growing.
Based on Supermicro's stock performance since shares peaked in early 2024, the market just doesn't believe that story. Supermicro stock is down about 74%, and the company's market capitalization has plunged to roughly $18 billion. That gives the stock a price-to-sales ratio below 1 based on analyst estimates for fiscal 2025 sales, a pessimistic valuation, to say the least.
That pessimism may be warranted. Supermicro's steep guidance cut is just one of multiple signals that red-hot demand for AI infrastructure could be cooling. In China, there's reportedly an oversupply of AI computing capacity following a frantic building boom. DeepSeek's efficient, cost-effective AI models, which require a fraction of the computing resources of top-tier AI models, have raised questions about how much AI computing capacity will actually be needed.
Microsoft and Amazon are now reportedly pulling back on some data center leases. While both companies are still expanding their AI computing capacity, economic uncertainty could be driving them to become more cautious about spending.
Add to those developments Supermicro's customer purchasing delays and inventory write-downs, and it's hard not to conclude that demand for AI infrastructure may not be as rock solid as it appeared to be a few months ago. There's a chance AI infrastructure is being overbuilt in the U.S., and the hangover from that overbuilding could cause demand for AI accelerators and AI servers to temporarily implode. That implosion may already be starting, given Supermicro's preliminary results, although it's hard to tell.
Supermicro stock looks like a bargain if you assume demand for AI servers will continue to rise going forward. If that's not the case, though, the stock could fall further as sales contract.
With so much uncertainty surrounding Supermicro, I'll be staying away from the stock.
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