Super Micro (SMCI)

Server solutions provider Super Micro (NASDAQ:SMCI) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 19.5% year on year to $4.6 billion. Next quarter’s revenue guidance of $6 billion underwhelmed, coming in 14.1% below analysts’ estimates. Its non-GAAP profit of $0.31 per share was 3.8% above analysts’ consensus estimates.

Company Overview

Founded in Silicon Valley in 1993 and known for its modular "building block" approach to server design, Super Micro Computer (NASDAQ:SMCI) designs and manufactures high-performance, energy-efficient server and storage systems for data centers, cloud computing, AI, and edge computing applications.

The Hardware & Infrastructure sector will be buoyed by demand related to AI adoption, cloud computing expansion, and the need for more efficient data storage and processing solutions. Companies with tech offerings such as servers, switches, and storage solutions are well-positioned in our new hybrid working and IT world. On the other hand, headwinds include ongoing supply chain disruptions, rising component costs, and intensifying competition from cloud-native and hyperscale providers reducing reliance on traditional hardware. Additionally, regulatory scrutiny over data sovereignty, cybersecurity standards, and environmental sustainability in hardware manufacturing could increase compliance costs.

Super Micro Computer competes with major server and data center hardware providers including Dell Technologies (NYSE:DELL), Hewlett Packard Enterprise (NYSE:HPE), Lenovo Group (OTC:LNVGY), and Inspur (OTC:ISPNF). In the specialized high-performance computing and AI server market, it also faces competition from NVIDIA (NASDAQ:NVDA) with its DGX systems.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $21.57 billion in revenue over the past 12 months, Super Micro is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.

As you can see below, Super Micro’s 45.6% annualized revenue growth over the last five years was incredible. This is a great starting point for our analysis because it shows Super Micro’s demand was higher than many business services companies.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Super Micro’s annualized revenue growth of 81.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Super Micro’s revenue grew by 19.5% year on year to $4.6 billion but fell short of Wall Street’s estimates. Company management is currently guiding for a 12.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 42.1% over the next 12 months, a deceleration versus the last two years. Still, this projection is eye-popping given its scale and suggests the market is forecasting success for its products and services.

Super Micro was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.2% was weak for a business services business.

On the plus side, Super Micro’s operating margin rose by 3.3 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Super Micro generated an operating profit margin of 3.2%, down 6.6 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Super Micro’s EPS grew at an astounding 23.3% compounded annual growth rate over the last five years. Despite its operating margin expansion during that time, this performance was lower than its 45.6% annualized revenue growth, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

We can take a deeper look into Super Micro’s earnings quality to better understand the drivers of its performance. A five-year view shows Super Micro has diluted its shareholders, growing its share count by 15.8%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Super Micro reported EPS at $0.31, down from $6.65 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.8%. Over the next 12 months, Wall Street expects Super Micro’s full-year EPS of $7.92 to shrink by 60.3%. This is unusual as its revenue and operating margin are anticipated to increase, signaling the fall likely stems from "below-the-line" items such as taxes.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Super Micro’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.6%, meaning it lit $5.56 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Super Micro’s margin dropped by 5.4 percentage points during that time. If the trend continues, it could signal it’s in the middle of a big investment cycle.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Super Micro’s five-year average ROIC was 22.4%, beating other business services companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Super Micro’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Super Micro is a well-capitalized company with $2.54 billion of cash and $2.49 billion of debt on its balance sheet. This $43.81 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see Super Micro’s full-year revenue guidance top analysts’ expectations. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed significantly and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 3.7% to $31.67 immediately following the results.

Updated: July 8, 2025 at 12:12 AM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Super Micro, you should also grasp the company’s longer-term business quality and valuation.

Super Micro is an amazing business ranking highly on our list. For starters, its revenue growth was exceptional over the last five years. And while its projected EPS for the next year is lacking, its scale makes it a trusted partner with negotiating leverage. On top of that, Super Micro’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Super Micro’s P/E ratio based on the next 12 months is 15.3x. Looking across the spectrum of business services companies today, Super Micro’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $43.87 on the company (compared to the current share price of $46.90).