- Instruments
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
San Jose-headquartered Super Micro Computer, Inc (ticker: SMCI) – better known as “Supermicro” – had been in operation for a long time and was relatively unremarkable in that it was just one of a number of companies building servers and storage systems for computing hardware (among other server-related areas). The company doesn’t manufacture chips, per se, but rather assembles the server around a chipmaker’s products in the most efficient manner. The founder, Charles Liang, holds several patents in server technology and the company went on to become one of the largest producers of high-performance and high-efficiency servers. His wife was the treasurer until 2019 (she continues to be on the board of directors) and his brothers run a manufacturing subsidiary, Ablecom, which is based out of Taiwan.
Up until 2015, key line item trends were fairly standard for a company battling it out in a relatively crowded marketplace in the face of moderately-growing server demand.
Source: Company Information; Leverage Shares analysis
While revenues (sales), costs and expenses bumped up with a fair bit of regularity as the company made inroads into the marketplace – with Intel initially being a prominent customer followed by AMD – the company did witness a decline in sales in 2020 as the pandemic ground business to a halt.
The company, however, did have one notable feature: since 2019, growth in net income (and net income per share) had turned positive and it was able to deliver a progressively higher net income per share despite the downturn in Fiscal Year (FY) 2020.
Note: For the company, the Fiscal Year ends on the last day of June of that calendar year.
In FY 2021, the company’s imprint on the server space grew manifold with the introduction of a large family of “blade servers” built around varying requirements in cloud computing, 5G telecommunications, edge computing and Graphical Processing Unit (GPU)-driven computing. With solutions around GPU-driven computing came an inherent edge for the “AI wave” that was then still a year or so away.
With higher capacities in processing came higher heat dissipation and the inevitable acceleration of chipset damage. In FY 2023, the company debuted a series of liquid-cooled server designs that saved approximately 40% of the power required to do the same via air-cooled server designs. Both factors led to its extensive utilization in server designs built around Nvidia chips.
How 2023 Led to a Year of Missed ExpectationsWith new edges in nascent technologies came a substantial bump in the company’s net income, which bolted in earnest in 2022.
Source: Company Information; Leverage Shares analysis
The company developed a trend of translating sales bumps into outsized net earnings while keeping operating expenses relatively low. Another trend that did kick off in FY 2023 was ballooning expenditures on stock-based compensation (SBC) for its management and workers. However, it bears noting that the share of expenses within different divisions has been relatively stable for nearly ten years now.
Source: Company Information; Leverage Shares analysis
As a percentage of net sales and even operating expenses, the total cost of SBC had been relatively miniscule and well within a band for most of the periods examine bar one: FY 2024, i.e. the year that ended as of June 30, 2024.
In this, it could be argued that an “externality” laid a heavy hand on the company’s earnings for the final quarter of its FY, wherein it missed expectations of delivering earnings of $8.07 by delivering $6.25 (adjusted) instead despite delivering $5.31 billion in revenue versus an expectation of $5.30 billion. The externality: investor interest.
Price Performance versus Price RatioThe comparison of the company’s stock performance versus its Price to Earnings (PE) Ratio can be divided into two “epochs” at the start of FY 2023:
Source: Leverage Shares analysis
Prior to FY 2023, while PE Ratio was heavily elevated at periods, it generally remained well within the semiconductor industry aggregate range of 15-25 while price performance (pegged from the start of FY 2015 onwards) maintained a fairly humdrum pace. All in all, par for the course: while server design is key for computing and the company has a history of delivering effective solutions for big-name chipmakers, the cornerstone of the semiconductor sector has always been chips.
In FY 2023, however, this changed. With Nvidia joining the ranks of its customers and its liquid-cooled solutions being deemed an effective solution, price performance (and PE Ratio) took off all the way till the tail end of Q1 2024. Since then, trends indicate that consensus investor actions are driving PE Ratio towards the semiconductor aggregate range again, which has largely remained unchanged.
Across FY 2023 alone, Supermicro’s stock price rose by a massive 537%. Relative to the start of FY 2024, SMCI had surged by an additional 377% (as of March 13, 2024) before closing FY 2024 with a net FY performance of a (comparatively) paltry 229%. In this period, net sales – in comparison – had effectively doubled.
Management and workers are well within their right to receive and exercise their SBC. As they did, the net earnings magnification efficiency the company had displayed in recent times dissipated to being only an 80% increase when a triple-digit percentage increase had been the norm in the “Age of AI Hype”.
In ConclusionThis “Age of AI Hype” has by no means ended: as of today, early trading trends in Nvidia indicate an attempt at a “comeback” is being pursued, which has been a trend through all of this current week after the “Big Drop” began last week. Meanwhile, SMCI continues to tread water with early trends indicating that a further drop in price is being pursued.
What creates the “Nvdia-Supermicro” nexus is that while Nvidia’s current flagship – the H100 – as well as the upcoming H200 can reportedly perform well enough in a server stack while being air-cooled, the price efficiencies for a datacenter increases when integrated with liquid-cooled designs. However, Nvidia CEO Jensen Huang (also from Taiwan, like Mr. and Mrs. Liang) has stated that Nvidia’s next-generation DGX servers – built around next-generation Blackwell chips that purportedly consume around 1,000-1,400 watts – would necessitate liquid cooling, which will likely draw great synergies between the two companies.
However, as the article about TSMC’s earnings1 indicated, institutional investors are quite concerned that AI-driven benefits aren’t nearly as transformative to necessitate as massive a buildout of facilities being mooted by tech megacaps that immediately depreciate in both value and performance (by wear and tear) once operational. If current datacenters don’t have to upgrade, there is no outsized incentive to rapidly switch from lower-margin air-cooled designs to higher-margin liquid-cooled designs. This spells problems for the company’s forward outlook, which means the stock has significant headwinds in valuation.
On the other hand, a stock in decline would mean that SBC expenses could trend downwards in the next FY and possibly raise passthrough net income efficiency. Markets are funny sometimes.
Footnotes:
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Share this:
By subscribing here, you agree with our Privacy Policy and you will receive our newsletters. You can unsubscribe at any time by following the link at the bottom of each newsletter.
Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.
Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
