SMCI...color me not impressed

I took a closer look at their Q4 earnings report. Read the earnings call transcript. Color me not impressed.

SMCI is a $28B market cap company with $9B in annual revenues and they have less than $400M of net cash on the balance sheet.

A risky stock with poor business fundamentals.

Wonder which sucker bought at today’s highs. In fact, this feels like a stock where someone would be buying it in the hope of selling it to someone else at a higher price in the near future.
Nothing wrong with that. But a viable AI stock this is not.

Granted explosive revenue growth. But it is beholden to the supply of scarce GPU chips from NVDA and AMD…aka very high supply chain risk.

SMCI could run out of cash and issue more debt and even do a secondary stock offering very soon.

They have negative cash flows because they are trying to expand their manufacturing capacity ASAP to capture as much AI server rack revenue while the sun shines. Risky strategy. Manufacturing plants could be built just in time to see demand slow down or dry up…or even competitors like DELL and HPE take away marketshare…And by then we could find ourselves past the steep part of the hype cycle.

Here is what the CFO said “And the reason that our cash flows were not – did not – were not as strong as last quarter was simply because we grew by so much.”
:man_facepalming:t4: I have never heard a statement like this on an earnings call.

Shrinking margins, shrinking and negative cash flows, increasing debt vs cash on hand, continuing shareholder dilution, very low margin commodity business.

It is very hard to convert a 15% gross margin into growing cash flows.

Imo, there are other, better AI stocks to own.

15 Likes

Except you forgot to mention that they almost doubled earnings sequentially and a little bit less than that YoY.

Also their Revenue was up 103 percent YoY and 73 percent Sequentially. Plus they guided for Revenue to be up 219 percent YoY next quarter.

They sell all they make and have a backlog because they can’t make enough. Their Gross Margins were down 3 percent but their Operating margins were up 2 percent showing they can control cost.

I do not think they have a moat but I do think they make a product that is in high demand right now. They grew their Sales per share by 30 dollars sequentially and is now at $159.32 all while selling more shares at around $260 dollars with the shares now at $517 dollars so it didn’t hurt the stock.

It is growing very fast and can keep this up for at least the rest of the year, according to management.

Andy

16 Likes

Sorry Beach but I’m with Andy on this one.

SMCI was so inexpensive, to the point of almost disrespectfully cheap. To me it was a no brainer and a must own pick and shovel play on AI, which might be the single most important play since the internet and the smart phone. Maybe more so.

I’m holding all my shares for 2024, and then I’ll decide what to do after that. I saw two firms raise their price targets to 650 and 690 this morning. Also management historically is conservative with their guidance. I could actually see them pre announce again next quarter. This is a train I’m staying on.

11 Likes

My original purchase was back in April around $100… I think it got highlighted at cheap with a PE around 9 and was growing quite well, it looked like a no brainer. But this kind of growth wasn’t being considered, it blew out expectations.

This is the main risk that I can tell. They are making huge investments based on current visibility of demand. But what if things settle to more tradition demand after the current spike? There was a time Peleton was losing money as they couldn’t keep up with demand, had to fly in inventory to shorten delivery times, expanding domestic manufacturing, etc…. That demand fell off very quickly due to different reasons. SMCI likely has a longer period of high demand but will it always be there or will after the huge investments from companies like META, will it go away? AFterwall, META wouldn’t likely to be able to keep up that level of capital expenditures I assume

5 Likes

It’s a commodity JDC not something you buy and hold forever. There is going to be a time where you are going to want to be out of it but by that time you might have doubled or tripled your money…maybe more. Why would you want to be missing those returns? That is the conundrum but hopefully when it is time to get out I will see the drop in orders. I think MSFT and GOOG would be a good barometer.

Andy

5 Likes

Good discussion folks…

I only have a few more points to reiterate:

  1. Cash is the lifeblood of a business and if a company runs low on cash flow, then it has to go to the debt or equity markets for a cash infusion. This usually results in shareholder dilution and/or lower business performance.

  2. Competitors are not sitting around waiting for SMCI to run away with all the business that is in the backlog. At some point, the backlog starts deteriorating when orders cannot be fulfilled…which we know is happening with SMCI by their own admission. They do not have enough chips coming in and they do not have enough liquid cooling AI rack manufacturing capacity today.

  3. Low gross margins are very tough to translate into higher profits and higher cash flows. It is quite a grind to lower the cost of goods sold…labor, factory design, raw materials, input components etc…most of these are out of your control or take a lot of time/money to squeeze costs out.

I think Andy said it best…this is a stock that one needs to exit when the tide turns. Just don’t be the last bag holder.

If I had money to put into AI investments, SMCI would not be top of my list. NVDA is one of the few companies making money in AI today…and the stock is still relatively cheaper imo…even now.

7 Likes

I agree with everything you have said except this Beach. Because it sounds like you are saying that SMCI isn’t making money while it is obvious they are. I am still waiting to see their Cash Flow Statement but I suspect the reason it is negative is because of all the inventory they are building up. Last quarter they had 607 million of inventory on their cash flow statement. Could it be over a billion this quarter?

Anyway thanks for the discussion. We do not have these types of discussion that much anymore and I miss going over the companies that report.

Andy

10 Likes

I’ve always seen NVDA as the play Beach. One of the only good things for me that came out of the IO Fund membership was buying and holding NVDA a few years back. I did trim shares late last year on the run up, but it’s still my third largest holding. I see SMCI as a compliment to NVDA, and yes as long as we don’t see slowing numbers coming out of some of these key players, I’ll stay the course with SMCI. Now if the stock price gets above 600 I’ll most likely trim it, otherwise I’ll enjoy the gains and the ride. We don’t get that many opportunities like this that often.

6 Likes

Well I did trim it at 630 and while I was doing it, in my gut I knew it was the wrong move. It felt like it would close higher and indeed it did. Even up another 20 bucks AH.

I’m not selling another share until we get to an overvalued situation, like if Wall St decides to give it a multiple like a NVDA, or one of the SAAS names.

I was kidding with someone this weekend saying SMCI might hit 750 this week. That could happen tomorrow.

Meanwhile NVDA just keeps marching app as well. Hey I’m not complaining, just feeling like the air is getting thinner up here.

6 Likes

Growing companies are not Fortune 5 cash cows or discounted value stocks. Good TMF Podcast this week about changing stock investing criteria with Columbia MBA Proff. It’s easy to be dismissive of high growth after 2008 spectacle of speculation.

Lack of cash flow is typical challenge of fast growing companies that they are addressing. Backlogs in semiconductor related stocks are standard due to long order fulfillment cycle and capital intensive nature of business. SMCI has simpler products yes, but still critical to end products of its customers. With demand strong disruption of supply chains with new suppliers is risky as all systems need to be go, go, go. (Can you tell I’m on ops?) I imagine all will spread a little business around if feasible from a product standpoint but changing an integrated supplier is a lot of headaches and distraction from growing their own business. Not a cash cow in harvest mode. Second-third stage of growth.

Management is excellent and all suppliers Dell HPE Qualcomm are doing well. SMCI was the red-headed step child until NVDA CEO called his SMCI friend up on stage last Spring and discussed their partnership so it’s been catching up. I have 40% in Semiconductor related stocks. Glad I found SMCI last spring. Sorry I sold half after it doubled. Should have looked at company fundamentals. Oh well🤑

4 Likes

Never be sorry for taking a profit, it’s what you thought was right at the time, and nobody’s got a crystal ball. And as long as you just trim to take some profit, you’re still in the game in case things continue to go up.

Wish I had done more of it in 2021… doing my best to remember and follow that advice myself in current times.

3 Likes

This is pretty powerful to me. A board member who had in the previous 3 years purchased a total of $600,000 in SMCI stock, just recently purchased over $1,000,000 in shares at a price of $568. What do they know now that they almost tripled their stake at these prices?

6 Likes

OBVIOUSLY… they know that the company has a trivial competitive advantage and that, despite recent monster growth in sales and revenues, that this growth is nearly over and that… due to declining margins… the company is facing imminent collapse! The purchase is merely a smoke screen to lure more ignorant investors to their doom.

</foolin’ around>

Disclosure: Our portfolio has absurdly high SMCI and NVDA allocations. Mostly due to growth in the share prices.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

6 Likes

Ok 875? Had to trim this morning, even though this puppy has all the momentum to keep going. Probably hits 1000 this week on sheer, well insanity? Still not incredibly overvalued, but up here I’d say fully valued to a bit bloated for sure.

So I trimmed at 630, 800 and now 875. I’ll just keep trimming down as the price keeps moving up.

5 Likes

Don’t forget this bull case…

Enjoy the ride :slight_smile:

1 Like

Not sure i understand that… seems to support SMCI where previously you thought there were much better AI plays?

While I can’t complain, I think the run up has been a bit insane.

Yup. Tik Tok is a very dependable source of investing advice. :slight_smile:

2 Likes

Barclays raised guidance yesterday to 961. Another firm day before to 925. Trust me, I’m enjoying the ride.

1 Like

Aiya… don’t think I can incorporate it in my prospecting…

Maybe you all could help me understand something.

SMCI sells servers. They have two companies that they work with that actually build their servers for them. ABLECOM and COMPUWARE. The reason these are related party transactions is because the CEO of SMCI is a brother of both of the CEO’s of those companies. It in a very convoluted relationship where all the companies are moving parts between each of the companies.

So we have Revenues, which come the distinction of related party sales. This is where SMCI has parts that they sell to both of these companies and is designated on the 10Q and 10K. Then you have related party purchases (I have it designated COGS)where SMCI buys back the parts from the companies in what I assume is a full size server. In the 10K it states that these companies make 86 percent of SMCI’s products.

Now if you look at those two designations, can you think of any reason on why sales would be lower this quarter than a year ago? Why would you think related part cogs are not rising as fast as Revenue over all? Now remember these two companies make 86% of SMCI’s product but the Revenue coming from them and going to them is not growing as fast. Is SMCI selling NVDA’s GPU’s instead of servers?

Maybe you can help me understand thanks.

Andy

2 Likes