Super Micro (SMCI) Won Over $60 Billion in Orders, Is the Discount Deserved?

Super Micro Computer (NASDAQ:SMCI) has spent October fielding questions about a smuggling case. A contractor linked to the company pleaded guilty earlier this month to helping ship servers loaded with advanced Nvidia chips to China, Reuters reported. Prosecutors say the scheme involved billions of dollars of U.S. AI technology. The company says it wasn’t named as a defendant and that the case hasn’t affected its business operations. If you’re looking for more undervalued stocks to play AI, check out our report on the 10 Undervalued AI Stocks to Buy Now.

But the business keeps getting bigger, and the stock is priced as if it won’t. Its multiple of expected earnings sits far below the sector’s. The question is whether that discount fairly reflects the legal risk, or whether it undervalues a company whose sales keep climbing. On the facts so far, the second reading looks closer, with one big condition attached.

The company builds the server racks that run AI data centers, including liquid-cooled systems for Nvidia’s newest chips. Its customers range from cloud providers to ordinary businesses. Its pitch is pre-assembled building blocks that get a data center running faster than buying parts one by one.

Orders Point to a Much Bigger Year

Sales for the fiscal year that ended in June reached $39.1 billion, up from $22.0 billion a year earlier. CEO Charles Liang said the company took in more than $60 billion of new orders over the year and added several hundred enterprise customers. It also entered the new year with a record backlog. Management is guiding to $65.0 billion to $72.0 billion in sales for fiscal 2027, a range whose low end sits well above all of last year. If you’re interested in AI infrastructure, we recently compiled a report on 10 Fastest-Growing AI Infrastructure Stocks to Buy.

This kind of growth has a long record behind it. Over the past five years, sales have grown about 61.5% a year, so the latest jump extends a long run instead of starting one.

Profit Is Finally Catching Up

Growth has come with thin margins, and that is where the surprise sits. Gross margin for the full year was 10.8%. Then, in the June quarter, it jumped to 17.5%, and net income for the quarter reached $1,178 million, well above the year-earlier quarter.

A single quarter can’t prove a new level. Over the past 12 months, operating margin was only 7.09%, so most of the year still looked like a low-margin business. If the June quarter holds, though, the company will earn far more on each dollar of sales than the full-year figure suggests.

The Export Case Is the Main Worry

The discount comes down to trust, and the Reuters report gives investors reasons to ask for it. Co-founder Yih-Shyan Liaw, who joined the board in 2023, and a former sales manager in Taiwan were also indicted in the same case. The indictment says the servers carried Nvidia chips that U.S. rules restrict, and it describes the scheme as starting around October 2023.

Management says it fired the contractor and cut ties with the other defendants earlier this year. Last week it also named a new chief financial officer, Mark Long, who reports directly to Liang. Neither step answers whether controls were tight when the shipments left. Because its newest racks are built around Nvidia chips, a wider probe or new limits on shipments would hit the product investors are paying for. Investors who want more on stocks falling out of favor can see our ranking of 10 Stocks Investors Are Running Away From.

The Stock Is Priced for Trouble

At 7.29 times estimated fiscal 2027 earnings, based on adjusted figures, the stock sits well below the sector median of 21.01 and below its own five-year average of 16.36. The consensus forecast calls for earnings per share to grow 19.49% for that year, so the market isn’t pricing in a shrinking company. For investors looking for cheaper growth, our list of 10 Undervalued Growth Stocks to Buy Now is worth a look.

If you own the shares, you’re effectively betting that the legal problems stay with a few individuals and don’t reach the numbers. The multiple leaves room for the sales guidance to fall short and still look cheap.

The discount looks too deep for a company with this much demand behind it, unless the export case widens. What decides it is the next report: whether gross margin stays near the June quarter’s 17.5% or slides back toward the 10.8% of the full year.

While we acknowledge the risk and potential of SMCI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SMCI and that has 10,000% upside potential, check out our report about this cheapest AI stock.

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This article is originally published at Insider Monkey.