Server manufacturer Super-microcomputer (NASDAQ:SMCI) peaked last year as demand for artificial intelligence (AI) hardware picked up steam. The stock has risen 550% since January 2023 and the company was listed on the S&P500 And Nasdaq-100 Indices.

Supermicro reported somewhat disappointing financial results earlier this week, sending the stock into a tailspin. But management was able to give investors at least one potentially positive piece of news: The company will conduct a 10-for-1 stock split at the end of September.

I call this news potentially positive because it could help Supermicro beat the market. Since 1980, the average stock has returned about 25% in the 12 months following the announcement of a stock split, while the S&P 500 has returned 12% in the same period, according to Bank of America.

Wall Street is more optimistic. Supermicro has an average price target of $995 per share for the next 12 months, representing an upside of 89 percent from the current price of $527. And the most optimistic analyst, Ananda Baruah of Loop Capital, believes the stock could rise 185 percent to $1,500 per share.

Investors need to know this.

Super Micro Computer is the market leader in servers with artificial intelligence (AI)

Supermicro manufactures high-performance computing platforms, including servers and storage systems. Its engineering expertise and modular design enable the company to bring new products to market quickly, making Supermicro the preferred provider for artificial intelligence (AI) servers.

To be more specific, the company conducts most of its research and development (R&D) and server assembly in-house at its Silicon Valley facilities. This allows for “rapid prototyping and product launch.” Supermicro also has a unique approach to product development where it uses common building blocks to assemble a wide range of servers.

This gives customers flexibility in developing custom computing platforms and enables Supermicro to quickly develop products with the latest chips from suppliers such as NVIDIA And modern micro devicesAccording to CEO Charles Liang, the company is usually two to six months ahead of the competition.

This advantage should keep Supermicro at the top of the AI ​​server market. Analysts at Bank of America expect the company’s market share to reach 17% by 2026, up from 10% last year. KeyBanc’s Tom Blakely is even more optimistic. He says Supermicro’s market share could exceed 20% this year and believes the company has “competitive moats that should maintain or even increase that share in the coming years.”

The story goes on

Other analysts are less optimistic. Matt Bryson of Wedbush Securities believes that other server manufacturers, such as Dell Technologies And Hewlett-Packard Enterprise (both are much larger than Supermicro) could imitate its modular product development and thereby negate its time-to-market advantage.

Supermicro failed to impress Wall Street with its latest financial report

Supermicro reported mixed financial results in its fourth quarter of fiscal 2024 (ended June 30). Revenue rose 143% to $5.3 billion, narrowly beating estimates, driven by record demand for AI infrastructure. However, non-GAAP net income rose 78% to $6.25 per diluted share, but Wall Street expected adjusted earnings to rise 130% to $8.14 per diluted share.

Wall Street was particularly disappointed by margins. Supermicro reported a gross profit margin of 11.2 percent in the fourth quarter, 5.8 percentage points lower than in the same quarter last year. This margin decline could be a sign of a lack of pricing power, which could lead to earnings growing slower than expected in the coming quarters. This concern caused shares to fall 13 percent after the report was released.

However, management attributed the margin decline to costs associated with express shipping of direct liquid cooling (DLC) components. Supermicro wants to position itself as a market leader in DLC, which will become increasingly necessary as companies deploy more AI servers. CEO Charles Liang expects gross profit margin to return to normal levels (14% to 17%) toward the end of fiscal 2025 when production capacities reach the required level. Investors should monitor the situation closely.

Management made some good predictions. Supermicro expects revenue to increase by over 200% in the current quarter due to a record backlog. “We are well positioned to become the largest IT infrastructure company, driven by our technology leadership,” CEO Charles Liang told analysts.

Supermicro shares appear cheap relative to Wall Street earnings forecasts

The AI ​​server market is expected to grow rapidly in the coming years, but estimates vary widely. Morgan Stanley Analysts expect AI server revenues to triple by 2030. JPMorgan Chase Analysts believe the market could grow more than six-fold by 2028. Either way, Supermicro has significant tailwinds and could create significant value for shareholders if it improves its gross profit margin.

Wall Street expects Supermicro to grow adjusted earnings 51% in fiscal 2025 (ending June 2025), but that number includes a wide range of individual estimates. The most pessimistic forecast calls for earnings growth of 22%, the most optimistic 76%. If the Wall Street consensus is correct, the current valuation of 24 times adjusted earnings seems quite reasonable. Anything above that only strengthens the case for owning the stock.

However, it is important to remember that Supermicro shares are currently trading 55% below their record high, and a significant portion of that correction has occurred in the past few weeks. However, shares could fall even further if the company misses consensus earnings estimates in the coming quarters, which is exactly what caused the share price to plunge after the company released its last financial report.

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JPMorgan Chase is a promotional partner of The Ascent, a Motley Fool company. Bank of America is a promotional partner of The Ascent, a Motley Fool company. Trevor Jennewine has a position in Nvidia. The Motley Fool has a position in and recommends Advanced Micro Devices, Bank of America, JPMorgan Chase, and Nvidia. The Motley Fool has a disclosure policy.

1 Stock-Split AI Stock to Buy Before It Surges 185%, According to Wall Street Analyst was originally published by The Motley Fool