Warning or Opportunity After Super Micro Computer's Earnings

Key Points

• Super Micro Computer management will release its latest preliminary results in the next quarterly announcement.
• While the figures don't look bullish for now, the implications are that the stock could be safe in the future.
• Taking risks and reward ratios into account, this is a play that investors could consider for their portfolios today.

Shares of Super Micro Computer Inc. NASDAQ: SMCI have been on a roller coaster of a ride over the past 12 months, swinging by triple-digit percentage points due to company-specific speculation and industry-wide uncertainties impacting future expectations of the business fundamentals. Some of these uncertainties have been cleared, while others seem to still have a negative effect on the way the market views the company today.

The most recent catalyst creating a cloud of uncertainty in Super Micro Computer’s future came in the form of trade tariffs rolled out by President Trump in the United States. This factor centered negative attention on the technology sector, as the trade dynamics for chips coming in and out of China and the broader Asian region will likely affect the trend for artificial intelligence development shortly.

That being said, Super Micro Computer made new announcements and rolled out preliminary financial figures that act as both a potential warning and a potential sign of better things to come in the future. There’s a different side to the same coin, and it will all depend on the risk appetite investors (and markets) bring to the table regarding this company and the broader sector.

What These Figures Imply for Super Micro Computer

Starting with the warnings from Super Micro Computer’s numbers, there are a few items to worry about as a buyer and a shareholder. The first is the lower guidance for revenues and earnings per share (EPS), mostly for the latter, as the company now expects to see half of the previous forecast.

Understanding that EPS is one of the major fundamental drivers in all price action for a stock, investors can now begin to understand why shares of Super Micro Computer fell by just over 10% during the week of the preliminary results being released, as nonbelievers and cautious investors started to take some of these risks into account.

However, there’s a bright side to all of this as well, and it begins with the fact that the company now has figures to report, steering speculation away from previous accusations of accounting fraud and another potential delay in filings now that the company has implemented a new accounting team and an auditor.

With this in mind, it seems the company is getting its financial affairs in order before the next quarter is filed and released, but there’s another hint in this latest report. The company credits the lower revenue and EPS figures to outside factors that seem more of a reality than an excuse.

Management mentioned that the reason behind these lower outlooks is that new orders are being rolled out until the next quarter, as customers are wary about making any capital-intensive decisions during an uncertain macroeconomic environment caused by trade tariffs.

Some of the bigger names in the technology space have hinted at sharing some of these issues as well, so crowds can understand that this is not a company-specific issue within Super Micro Computer but rather an industry-wide complication that will inevitably be resolved.

What’s The Market’s Take on The Future?

While the current price action in the stock won’t give the bulls any credit when it comes to evidence of better times ahead, the other side of the equation (the bears) can provide a bit more clarity as to how they feel about the stock today. Over the past month, 10.8% of Super Micro Computer’s short interest was removed from the overall float.

Investors can take away from this the fact that short sellers are realizing that the current downside profile is minimal compared to what the stock could do in a potential upside move. But the question is what sort of upside could be expected from this stock now that the bearish traders are starting to give up on their views.

That’s a question for Wall Street analysts to answer, and a beginning can be the current consensus price target, which is set for up to $48.7 per share and calls for a net implied rally of just under 50% to deliver investors into much better territory of acceptance into better uptrends moving forward.

Zooming out a bit more, investors need to understand that the tailwinds present for data center demand and implementation are the same tailwinds at play for some of the industry's bigger names. Some have already reported favorable earnings and outlooks regarding further artificial intelligence developments and adoption rates.

With this in mind, the gap to be filled on the upside is much larger than the gaps to be considered for the downside potential, creating the asymmetric opportunity that gives traders the paycheck they hunt for all year.