Once the market action comes to a halt, Super Micro Computer (NASDAQ:SMCI) will step up to deliver its fiscal third-quarter results. The AI server maker heads into the print with improving momentum, as shares have rebounded 35% since bottoming on March 20.
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So, can the print help the stock keep up the momentum? Not according to investor Louis Gerard, who remains “skeptical of the firm’s prospects.”
First off, the company has faced various governance issues over the past few years, the most recent being a federal criminal case in which co-founder Wally Liaw and others were indicted for allegedly helping to smuggle restricted AI servers to China. That remains a “critical overhang on the stock price.” However, Gerard sees a bigger problem that the stock has yet to factor in.
That is due to reports stating Oracle may have canceled a major AI server infrastructure order, potentially signaling that governance-related concerns are starting to weigh on the company’s backlog. According to Bluefin Research, Oracle scrapped plans to buy 300–400 high-performance AI server racks from SMCI, each priced at about $3.5 million, implying a possible revenue hit of up to $1.4 billion, although Gerard admits this has not been verified yet. Nevertheless, if true, the move points to shifting supplier preferences among hyperscalers, with Oracle’s decision reportedly tied to compliance concerns stemming from the Liaw indictment.
As for what Gerard will be looking for in the print, beyond the headline figures, the investor’s key focus will be on gross margins, which fell to a record low of 6.4% last quarter. Management has guided for a modest rebound to around 6.7%, a level the market appears to treat as a floor. If margins fail to reach even that level, it would suggest continued erosion in pricing power against competitors like Dell Technologies and could trigger a sharp stock reaction.
Gerard will also be watching how the customer mix is shifting. Beyond Oracle, it seems xAI has been moving some of its business over to Dell and Hewlett Packard. The company has said any update on this will come with the earnings release, which puts management in a tough spot. If they confirm it, it points to losing key customers, but if they stay quiet, the market is likely to assume the worst anyway. If they dodge the question altogether, Gerard would take that as a negative signal, and the stock would likely react poorly.
Summing up, Gerard says SMCI has shifted from a “pure-play AI growth story into a high-stakes corporate turnaround, which brings a cloud of risks.”
To this end, heading into earnings, Gerard rates the stock a Sell. (To watch Gerard’s track record, click here)
Turning now to Wall Street’s take, 2 analysts join Gerard in the bear camp, although with an additional 8 Holds and 3 Buys, the stock claims a Hold (i.e., Neutral) consensus rating. The forecast calls for 12-month returns of 10%, considering the average price target stands at $30.53. (See SMCI stock forecast)
Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.