Without Nvidia’s (NASDAQ:NVDA) breathtaking success story, you probably wouldn’t be thinking about Super Micro Computer (NASDAQ:SMCI) much in 2024. You might have purchased Super Micro Computer stock back in March, when the hype was at its peak. It’s wise to sell now, before the shares decline further in the upcoming months.
Furthermore, Super Micro Computer set high expectations for itself, and now the company has to live up to those expectations. Otherwise, Super Micro Computer shares could lose a lot of value during this year’s second half. It’s just not a favorable risk-to-reward proposition right now, so I definitely don’t recommend investing in Super Micro Computer.
Riding on Nvidia’s Coattails
Super Micro Computer is a Russell 2000 member that was suddenly thrust into the spotlight during the past several quarters. Super Micro Computer’s shareholders can thank Nvidia and the artificial intelligence trend for that.
Since Super Micro Computer sells AI-enabled servers, some traders bought Super Micro Computer stock in March hoping to catch the “next” Nvidia stock. In April, I warned Super Micro Computer’s overeager investors about rollover risk.
After the publication of that article, Super Micro Computer stock did, in fact, continue to gradually roll over. The stock got a quick bump when Nvidia reported its blockbuster results for fiscal 2025’s first quarter, but that bump didn’t last for more than a few days.
Moreover, there’s plenty of room below for the Super Micro Computer share price to continue falling. Value investors should be concerned, as Super Micro Computer has a trailing 12-month price-to-earnings ratio of 46x. That’s substantially higher than the sector median P/E ratio of 30.73x, which itself seems uncomfortably high.
The Dangerous ‘Beat-and-Raise’ Game
Recently, MarketWatch observed the “beat-and-raise game” that Nvidia, Super Micro Computer and other technology firms are playing nowadays. It’s a dangerous game to play, and Super Micro Computer may be setting itself up for failure.
Actually, Super Micro Computer didn’t deliver a top-line “beat-and-raise” in the company’s third-quarter fiscal 2024 report. Wall Street called for Super Micro Computer to generate quarterly revenue of $3.99 billion, but company fell short with revenue of $3.85 billion.
Super Micro Computer did raise its full-year top-line guidance, though. In its second-quarter fiscal 2024 report, Super Micro Computer hiked its revenue guidance for fiscal year 2024 (ending June 30), from $10 billion to $11 billion, to a much higher range of $14.3 billion to $14.7 billion.
In case that wasn’t enough of a sales guidance hike, Super Micro Computer upped the ante again in its Q3 FY2024 report. Now, Super Micro Computer expects to generate full-year revenue of $14.7 billion to $15.1 billion.
Thus, over the past two quarterly reports, Super Micro Computer dramatically raised its full-year sales expectations. It looks like the company is trying to play the “beat-and-raise” game, but without the “beat” part of the equation. Potentially, it’s a setup for disappointment in the next quarterly earnings-report cycle.
Super Micro Computer Stock: Not the Best Russell 2000 Pick for 2024
Russell 2000 member Super Micro Computer is now a famous company, but that’s mainly because of the hype surrounding Nvidia and AI. Now, it’s worrisome that Super Micro Computer has an inflated valuation and high full-year revenue expectations.
Consequently, judicious investors should find another Russell 2000 pick besides Super Micro Computer.
The risk-to-reward balance isn’t favorable, and value-focused stock traders should be seriously concerned about Super Micro Computer. Thus, I’m sticking to my bearish outlook and expect Super Micro Computer stock to continue rolling over in 2024’s second half.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
