Super Micro Computer (NASDAQ: SMCI), more commonly often called Supermicro, was certainly one of the most well liked artificial intelligence (AI) stocks this 12 months. Its shares closed at a record high of $1,188.07 on March 13, representing a 2,760% gain over the previous two years, as its sales of dedicated AI servers skyrocketed.

But as of this writing, Supermicro’s stock trades at $424. 4 issues caused that slide: concerns about its declining gross margins, troubling allegations from a prolific short-seller, a delayed filing of the corporate’s annual report, and Nvidia‘s (NASDAQ: NVDA) decelerating sales growth. Let’s have a look at if investors should purchase or avoid this fallen AI stock.

The bull case for Supermicro

Supermicro controls a smaller slice of the server market than Dell Technologies or Hewlett Packard Enterprise, however it carved out a distinct segment with its high-performance liquid-cooled servers. That strategy made Supermicro a great partner for Nvidia, which provided the corporate with a gentle supply of its high-end data center GPUs.

Consequently, Supermicro’s sales of dedicated AI servers skyrocketed because the rapid expansion of the AI market drove many corporations to upgrade their data centers. The corporate’s revenue rose only 7% in fiscal 2021 (which resulted in June 2021) but surged 46% in fiscal 2022, 37% in fiscal 2023, and 110% in fiscal 2024 as those AI tailwinds kicked in. Analysts expect its revenue to grow one other 89% in fiscal 2025 and 12% in fiscal 2026.

Bank of America estimates that Supermicro already controls 10% of the dedicated server market, and it expects it to grow its share to 17% inside the subsequent three years as the complete market expands 150%. The bulls consider that Supermicro’s booming AI server business, which already accounts for over half of its revenue, will offset its slower sales of traditional servers. That is why its stock has rallied alongside Nvidia’s over the past two years.

The bear case against Supermicro

Supermicro has grown like a weed over the past 12 months, but a number of cracks within the bull thesis appeared during its fourth-quarter earnings report on Aug. 6. Its 144% year-over-year revenue growth exceeded Wall Street’s expectations, but its 78% adjusted earnings growth broadly missed the consensus forecast for 130% growth.

Data source: Super Micro Computer. YOY = 12 months over 12 months.

The primary perpetrator was the gross margin, which fell each sequentially and 12 months over 12 months as the corporate sold a less lucrative mixture of mostly lower-margin products and ramped up spending on its newest direct liquid cooling (DLC) solutions. That contraction is troubling since it indicates Supermicro is selling its AI servers at considerably lower margins than its traditional servers.

That lack of pricing power was already weighing down Supermicro’s stock when Hindenburg Research released a short-seller report on Aug. 27. Short-sellers become profitable when a stock on which they’re “short” falls. The firm alleges Supermicro “faces significant accounting, governance and compliance issues and offers an inferior product and repair being eroded away by more credible competition.” It points out that Supermicro’s cloud take care of Amazon Web Services (AWS) ultimately failed and that its “exclusive” take care of Tesla actually ended when the EV maker struck an analogous take care of Dell this May.

Hindenburg leveled other allegations and the next day Supermicro postponed its 10-K filing, saying it needed “additional time” to evaluate its “internal controls over financial reporting.” Its stock plummeted after that startling announcement, and it continued dropping after Nvidia posted its latest earnings report — which featured strong but slowing sales of its data center chips.

Is it time to purchase or sell Supermicro’s stock?

Supermicro’s stock trades at just 13 times forward earnings after its near-40% decline over the past month. That is a low valuation, but its shrinking gross margins, the troubling short-seller accusations, and its delayed 10-K filing raise some shiny red flags. Its insiders also didn’t buy a single share of the stock because it collapsed over the past three months.

I believed Supermicro was an undervalued growth play after its postearnings plunge, but until Supermicro clears up the cloud around it with a transparent 10-K filing, it’s smarter to avoid or sell its stock and follow more promising AI plays as an alternative.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Bank of America is an promoting partner of The Ascent, a Motley Idiot company. Leo Sun has positions in Amazon. The Motley Idiot has positions in and recommends Amazon, Bank of America, Nvidia, and Tesla. The Motley Idiot has a disclosure policy.

Super Micro Computer’s Stock Sinks: Time to Buy or Sell? was originally published by The Motley Idiot