Super Micro Jumps 8% on Margin Recovery, But Cash-Flow Worries Linger

As of 12:30 p.m. ET on August 4, Super Micro Computer (SMCI) traded at $30.99, up 8.21% (+$2.35) from the prior close of $28.64. The stock opened at $29.35, hit an intraday high of $31.03, and dipped to a low of $29.07.^[ts2.tech] The rebound comes ahead of the company's Q4 fiscal earnings release on August 11. While preliminary data points to a meaningful gross margin recovery, the $6.6 billion operating cash outflow last quarter has investors wary of the server maker's ability to convert revenue into cash. The stock had fallen 5.65% over the prior week, closing at $28.40 on Friday, July 31, up 2.42% on the day.^[ts2.tech]

Preliminary Margin Guidance Improves Sharply, Revenue Near Low End

Per ts2.tech, management preliminarily expects Q4 gross margin of 15% to 17%, with revenue near the low end of the prior $11 billion to $12.5 billion guidance range, at roughly $11 billion.^[ts2.tech] For context, Q3 GAAP gross margin was 9.9%, versus prior Q4 guidance of 8.2% to 8.4%. The preliminary figures imply a sequential margin expansion of 510 to 710 basis points. On $11 billion in revenue, gross profit is expected at $1.65 billion to $1.87 billion, up 62% to 84% from Q3's $1.019 billion.^[ts2.tech]

It's worth noting that revenue near the low end of guidance — about $11 billion — comes in roughly 5.7% below the LSEG consensus of $11.67 billion.^[ts2.tech] Still, ts2.tech's report argues that a favorable product and customer mix is expected to be enough to offset the revenue shortfall at the gross profit level. These preliminary figures have not been audited.^[ts2.tech]

Cash-Flow Concerns: $6.6 Billion Operating Outflow Last Quarter

Despite the improving margin outlook, the balance sheet remains the core of market caution. Per ts2.tech, Super Micro saw cash reserves decline sharply in Q3 even as gross profit grew.^[ts2.tech] Operating cash flow was negative $24 million in Q2, then swung to negative $6.6 billion in Q3 — a sequential deterioration of $6.576 billion.^[ts2.tech] Over the same period, revenue fell from $12.682 billion in Q2 to $10.243 billion in Q3, down 19.2% sequentially, while gross profit rose from $799 million to $1.019 billion, up 27.6%.^[ts2.tech]

ts2.tech's report notes that after the $6.6 billion operating cash outflow, the ability to convert revenue into cash has become more important than revenue growth itself. The report says this divergence gives investors a clear benchmark to watch.^[ts2.tech]

Last Week's Trend: Lagging the Market and Peers

Last week (July 24-31), Super Micro shares fell 5.65%, closing at $28.40 on Friday, July 31, up 2.42% on the day.^[ts2.tech] Over the same period, Dell Technologies (DELL) fell 7.34%, Hewlett Packard Enterprise (HPE) rose 0.44%, and Nvidia (NVDA) fell 2.94%. The S&P 500 gained 1.05% for the week, while the Nasdaq Composite rose 1.59%.^[ts2.tech]

On Friday, July 31, roughly 35 million shares traded — about 65% of the stock's 65-day average volume — meaning trading activity did not strongly confirm the day's gains.^[ts2.tech] Earlier, on Wednesday, July 29, the stock had plunged 9.7%, hitting an intraday low of $25.68 before closing at $25.70, versus the prior close of $28.45.^[MarketBeat] Volume that day was 39,938,072 shares, down 9% from the average daily volume of 43,978,859.^[MarketBeat]

Separately, per Zacks, in the trading session before July 29, Super Micro closed at $28.45, down 4.56% from the prior session, while the S&P 500 rose 0.21%, the Dow Jones Industrial Average gained 1.03%, and the Nasdaq fell 0.22%.^{[Yahoo Finance]} As of that point, however, the stock was up 5.9% over the past month, versus a 2.91% decline for the Computer and Technology sector and a 1.7% gain for the S&P 500 over the same period.^{[Foreign Policy Journal]}

Earnings Expectations and Analyst Views

Super Micro is scheduled to report Q4 earnings on August 11.^{[Yahoo Finance]} Zacks Consensus Estimates projects EPS of $0.68 for the upcoming quarter, up 65.85% year over year, on revenue of $11 billion, up 91.07%.^{[Yahoo Finance]} For the full fiscal year, Zacks Consensus Estimates forecasts EPS of $2.56 and revenue of $39.49 billion, representing changes of +24.27% and +79.71%, respectively.^{[Foreign Policy Journal]} The Zacks Consensus EPS estimate has been revised upward by 6.78% over the past month, and the stock currently carries a Zacks Rank #3 (Hold).^{[Foreign Policy Journal]}

On valuation, Super Micro trades at a forward P/E of 8.83, below its industry average of 15.19, with a PEG ratio of 0.31 versus the computer storage devices industry average of 1.47.^{[Foreign Policy Journal]} The computer storage devices industry currently ranks #22 in Zacks' industry ranking, placing it in the top 9% of the 250+ industries Zacks tracks.^{[Foreign Policy Journal]}

Per MarketBeat's aggregated data, several firms have recently weighed in on Super Micro with ratings and price targets: Northland Securities set a $36.00 target on July 22; Citi maintained a "Neutral" rating on July 13 and raised its target from $31.00 to $33.00; Wolfe Research initiated with a "Peer Perform" rating on June 11; Rosenblatt Securities set a $45.00 target with a "Buy" rating on July 22; and CJS Securities upgraded the stock from "Underperform" to "Market Perform" on May 6.^[MarketBeat] Among analysts covering the stock, 4 rate it a "Buy," 12 a "Hold," and 2 a "Sell." The average rating is "Hold," with an average price target of $39.21.^[MarketBeat]

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