Supermicro (SMCI) Downgraded Due to Commoditization of Server Liquid-Cooling Technology

This article does not constitute investment advice, and the author holds no positions in the stocks discussed.

Supermicro’s Current Challenges in the AI Server Market

Supermicro (SMCI), a key player in the GPU-as-a-Service market and a notable supplier of liquid-cooled AI server racks, faces multiple obstacles that could impact its future performance. Analysts are raising concerns regarding its internal control mechanisms, the increasingly competitive environment, and the diminishing uniqueness of its liquid-cooling technology.

Analyst Assessment

In recent coverage, Bank of America analyst Ruplu Bhattacharya has taken a bearish stance on Supermicro, assigning an ‘Underperform’ rating and setting a stock price target of $35. This target suggests a potential downside of approximately 28% from the current trading price of $48.69.

Key Concerns Identified by Analysts

Bhattacharya has outlined five primary bearish catalysts affecting Supermicro’s stock:

Margin Pressure: The company is expected to experience margin compression in the near term due to high inventory levels of outdated products and intensified competition.
Revenue Growth Constraints: Limited availability of GPUs and essential components for liquid cooling technology may hinder revenue growth.
Competitive Landscape: Rival firms like Dell and HP are effectively utilizing their strong enterprise customer bases to gain a competitive advantage in the AI server market.
Internal Risks: Ongoing investigations and litigations pose intrinsic risks for the company, compounded by a comparatively weak internal control framework.
Technological Commoditization: Supermicro’s liquid-cooling technology, a significant differentiator, risks becoming “commoditized, ”enabling competitors to reduce the technological gap.

In light of these concerns, Bhattacharya projects a decline in Supermicro’s gross margin from 11.3% for FY 2025 down to 9.4% by FY 2027.

Recent Developments

Interestingly, Supermicro recently raised approximately $2 billion by issuing convertible senior notes to qualified investors. In addition, the company has entered a “multi-year partnership agreement” with DataVolt, a prominent data center company in Saudi Arabia.

According to Goldman Sachs, this partnership could potentially yield $5 billion in annual revenue and an estimated EBIT of around $200 million over a five-year contract, with a projected profit margin of about 5%.

Market Performance

As of this writing, Supermicro’s stock has decreased by slightly more than 1% in pre-market trading. Over the past month, the stock has increased by approximately 14%, and when viewed year-to-date, gains reach an impressive 63%.

The evolving landscape in the AI server market presents both challenges and opportunities for Supermicro as it navigates through its current trials.

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