How quickly fortunes change. Super Micro Computer (SMCI) stock is down 46% over the past 12 months but up 586% since 2022. Less than a year ago, the stock was flying high, above $100 per share, as SMCI joined the S&P 500. Now, it trades at under $30 and could soon be delisted.

Today, shareholders face a cornucopia of downside risks, including corporate governance issues, misconduct, and concerns about long-term demand souring due to DeepSeek’s market entry. In all fairness, there are plenty of good points about this stock, too: the server manufacturer has multiple unique situation catalysts, including a large tranche of billed customers later this year. Not only that, the stock is trading at its cheapest multiples since early 2023.

As you will soon see, there’s a lot to dislike about this stock, and there’s a lot to like. In my view, SMCI will either hit its home run and deliver big for investors or wilt in the sun of Chinese competition to leave investors empty-handed. It’s all or nothing with SMCI.

And that’s why, after being on the fence for months, I’m finally turning bearish on Super Micro Computer simply because there’s far too much risk and far too little reward to justify investing, even with a short-term buy-the-dip approach looking for small, quick gains.

What Does DeepSeek Mean for SMCI?

Let’s start with the topic in vogue: DeepSeek. DeepSeek is a Chinese artificial intelligence (AI) lab that shocked the stock market with its R1 language model. Reportedly, the AI’s training costs just $5.6 million using older Nvidia (NVDA) chips and offers comparable performance to many Western chatbot peers, including ChatGPT. For context, this is just 2% of the typical cost of producing a large language model (LLM).

Of course, some questions remain outstanding concerning DeepSeek. Analysts are questioning the validity of this $6 million figure and whether DeepSeek may have evaded sanctions on high-performance chips. Some evidence suggests that the LLM could have been built on as many as 50,000 H100 Nvidia chips.

However, the methodology and modeling suggest SMCI has made some breakthroughs, inferring that AI should be cheaper and less dependent on high-powered infrastructure. That could be a concern for Super Micro, which specializes in data center servers with liquid cooling ideally suited for high-level workloads.

There is an emerging school of thought that the DeepSeek model will democratize AI, leading to broader adoption and a more competitive ecosystem. Demand for Super Micro’s data center servers could grow if more companies, not just hyperscalers, enter the AI and data center market. For now, however, there’s a lot of uncertainty, which ultimately translates into shareholder anxiety.

February is the Month of Inflection for Super Micro

February 2025 has several inflection points for SMCI, as the company faces one critical milestone and one critical deadline that will significantly impact its future. The more crucial of the two is February 25, when Super Micro must submit its delayed audited financial statements to the SEC to maintain Nasdaq compliance. This includes a 10-K for the 2024 financial year and a 10-Q for Q1 2025. The critical milestone, however, is next week. Some confusion still reigns supreme about when exactly SMCI will publish its performance metrics, including earnings for Q2 FY2025. Official sources expect an announcement next week, although unofficial reports claim Nasdaq has allowed SMCI an extension to file their quarterlies.

Like in a casino, it will be red or black for SMCI and its shareholders in February 2025. Expect volatility and lots of bruised investors, regardless of the outcomes. There is so much pent-up sentiment among bulls and bears that whichever way SMCI’s stock price moves, it will be extensive.

If Super Micro successfully files its reports by the February 25 deadline, it could trigger a substantial relief rally. However, a failure to file would leave the stock price reeling. It’s rather difficult to imagine a company failing to sustain operations because of a paperwork issue. So, assuming compliance is achieved, the market should re-focus on the company’s inherent valuation and market prospects.

Cheap Valuation Screams Buy

There’s no doubt that Super Micro Computer’s valuation is attractive on paper. The stock is trading at 12.2x forward earnings, significantly lower than its sector median of 25x and its 5-year average of 15.8x. This indicates that the stock is potentially undervalued compared to its peers and historical performance. Meanwhile, the company’s forward price-to-earnings-to-growth (PEG) ratio stands at a remarkably low 0.33, suggesting the stock may be undervalued relative to its expected growth rate.

Moreover, Super Micro’s financial position appears secure, with $1.67 billion in cash offsetting $2.17 billion in total debt, providing the company the flexibility to manage its operations and invest in growth. Coupled with the declining price-to-earnings (P/E), reaching 7.6x by 2026, this stock appears to have a compelling investment case.

However, investors focusing on the valuation data will also want to note that the price-to-cash flow ratio is 42% higher than the index average. Coupled with the aforementioned concerns on compliance and future demand, this could sour the investment case for many investors. In my opinion, these metrics, despite being attractive, aren’t a compelling reason to overlook the systemic risk.

Is Super Micro a Good Stock to Buy?

On TipRanks, SMCI carries a Hold rating based on one Buy, four Hold, and two Sell ratings assigned by analysts over the past three months. The average SMCI price target is $26.80 per share, implying a 3.6% downside potential.

Casinos Are Not for Investors

I’m bearish on Super Micro Computer despite its seemingly attractive valuation. The stock’s recent decline, corporate governance struggles, and the disruptive potential of DeepSeek introduce significant downside risks.

While the upcoming February deadline could bring relief if met, failure to comply would likely trigger further losses. Moreover, the flurry of tier-2 clients the company expects to monetize later this year may pay up this time, but when it comes to renewed business over a protracted multiyear timeframe, competition in the space is fierce, and SMCI’s offering is not truly unique.

I recognize that SMIC’s upside is potentially huge, but so is the potential downside. The risks outweigh the reward potential, so given the stark contrast of risk-reward, I’m cashing out much like in a casino.

https://www.tipranks.com/legal/disclosure-1