Key Points
Supermicro saw a big improvement in margins, but the stock remains shrouded in controversy.
The news from Supermicro should bode well for Nvidia, which is the safer and smarter stock to buy.
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Super Micro Computer (NASDAQ: SMCI) shares surged nearly 20% on July 22 after the company pre-announced strong preliminary results. While its second-quarter revenue is expected to come in toward the low end of its $11 billion to $12.5 billion range, that is still about double the revenue it generated a year ago. More importantly, it projected that its gross margins would rise to a range of 15% to 17%, well above its 8.2% to 8.4% guidance.
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Supermicro, which designs and assembles servers and rack solutions for data centers, has struggled with margins, so this is a piece of welcome news. However, this is generally a low-margin business, and the surprising jump in margins is likely largely due to supply shortages.
There have been shortages of key AI infrastructure components for things like memory, central processing units (CPUs), and graphics processing units (GPUs), so hyperscalers and enterprises that want complete systems right away are more likely to pay up for a complete system from an integrator. A shift toward enterprise or sovereign clients, which have less buying power, can also positively impact margins.
That said, this dynamic could be temporary, and Supermicro is still, by and large, a low-margin middleman. It also has a history of controversy, and its offices in Taiwan were raided at the end of June, related to employees smuggling chips to China. So instead of owning Supermico shares, I think buying Nvidia (NASDAQ: NVDA) is the much safer and smarter bet.
Image source: The Motley Fool.
Nvidia is the better stock to own
Supermicro and most other integrators build their servers around Nvidia GPUs, so the strong demand it is seeing and its ability to boost margins speak volumes to the current high-demand environment for Nvidia’s chips and components. In fact, this can be a great leading indicator.
When looking at where most of the value resides, this is with Nvidia and its GPUs. Supermicro is largely passing along high GPU prices to its customers; that’s why its revenue is so high and its gross margins are generally low. Nvidia, on the other hand, has gross margins around 75%. So, what is good news for Supermicro is ultimately even better news for Nvidia, and you are getting a much more attractive company in Nvidia with a lot less controversy.
As Supermicro’s preliminary Q2 numbers show, there is no current let-up in demand for AI infrastructure. At the same time, earlier commentary and an increase in capex from leading foundry Taiwan Semiconductor Manufacturing also point to strong long-term demand. With the king of AI infrastructure trading at a forward P/E of only 16 times fiscal 2028 (ending January 2028) estimates, investors don’t need to overthink this and can just buy the stock of the high-quality market leader.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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