Key Points
- Barclays analysts downgraded Super Micro Computer shares to equal weight and revised their price target to $438 due to declining margins and customer losses.
- SMCI’s gross margins fell to 11.3% in the June quarter, with AI and DLC server margins particularly weak.
- Delays in financial reporting and past regulatory issues have raised governance concerns.
- Barclays favors Flex as a better investment in the AI sector due to its involvement in GB200 systems and Google TPU servers.
Super Micro Computer, Inc. (NASDAQ: SMCI) fell on Wednesday following a downgrade from Barclays. The stock was down 3.12% in pre-market trading at 8:45 AM (ET) as Barclays analysts expressed concerns about SMCI’s prospects, leading to a downgrade to an equal weight rating and a revised price target of $438. Declining gross margins, persistent customer losses, and issues with internal controls drove the downgrade.
Barclays highlighted SMCI’s challenges with gross margins, noting a significant drop in the June quarter to 11.3%, down 430 basis points from the previous quarter. Margins for AI servers were in the high single digits, and Dedicated Liquid Cooling (DLC) server margins were even lower. Analysts noted that SMCI has been providing DLC components for free to match or undercut Dell’s (NYSE: DELL) air-cooled rack pricing, adding pressure on margins amid supply chain constraints.
The analysts also pointed out SMCI’s loss of market share with its top customers, Musk entities, and Coreweave. Previously, SMCI was the exclusive supplier for Musk Inc., but recent developments have seen this business split evenly between SMCI and Dell, reducing SMCI’s market share to about 50% by June 2024 from 100% in 2023. Coreweave has similarly reduced its reliance on SMCI, which is attributed to improved GPU supply and Dell’s competitive positioning.
Barclays raised concerns over SMCI’s upcoming GB200 server platform, fearing the company might capture a smaller market share than its Hopper-based servers. The expected lower margins for GB200 servers and lack of definitive customer orders add to the uncertainty, particularly as competition intensifies.
The downgrade also reflects worries about SMCI’s internal controls and corporate governance, highlighted by the delayed filing of its 10-K report. The company’s past regulatory issues and a previous Nasdaq delisting have exacerbated concerns about transparency and governance.
Barclays adjusted SMCI’s price target to $438, reflecting a valuation multiple of 12x FY25E EPS of $36.48, aligning more closely with Dell’s valuation multiple. Despite Super Micro Computer’s challenges, Barclays remains optimistic about the AI sector and has identified Flex (NASDAQ: FLEX) as a preferred alternative, citing its growing role in GB200 systems and Google TPU server assembly.
