Following the fourth quarter earnings reportShares of Super-microcomputer (SMCI 5.13%) fell 20% in the next trading session even though the server solutions company announced a stock split and issued strong revenue guidance. Despite the decline, the stock is still up about 70% year-over-year.

Let’s take a closer look at the company’s quarterly results, the reasons for the sell-off, and whether investors should buy more as the stock dips.

Strong sales and forecasts, but concerns about margins

In the fiscal fourth quarter, Super Micro reported a 143% increase in revenue to $5.31 billion, which was pretty much in line with analysts’ expectations. However, earnings per share (EPS) of $6.25 fell well short of expectations of $8.07 due to the gross margin pressure the company faced during the quarter.

Gross margin, which measures the difference between a company’s selling price for its products or services and the cost of delivering those products or services, fell to 11.3% from 17% a year ago and 15.5% last quarter. The lower margins resulted from product mix, lower prices to attract new designs, and higher costs associated with upgrading its direct liquid-cooled (DLC) rack-scale AI GPU clusters. The company expects gross margins to gradually increase over the course of fiscal 2025 and eventually return to its target range of 14% to 17%.

The company attributed its strong growth to its next-generation air-cooled and DLC rack-scale AI GPU platforms. Servers generate a lot of heat and these systems help keep them cool to avoid outages while reducing energy costs. Super Micro is seeing high demand for its DLC systems as enterprises expand their data center capacity to run artificial intelligence (AI) applications. The company said it has over 70% market share in the DLC space.

Image source: Getty Images.

Despite its tremendous growth, Super Micro said growth could have been even greater had it not been for a shortage of DLC liquid cooling components. The company estimated that revenue fell by about $800 million in July after the end of its fiscal fourth quarter due to the component shortage.

Looking ahead, Super Micro is forecasting full-year revenue of between $26 billion and $30 billion, a 100% increase in revenue at the high end of its guidance, after the company generated revenue of $14.9 billion last fiscal year.

For the first quarter of the fiscal year, the company forecast revenue of $6 billion to $7 billion and adjusted earnings per share of $6.69 to $8.27. The midpoint of $7.48 was below the analyst consensus of $7.58.

The company also announced a 1:10 stock split. While stock splits do not change a company’s fundamentals, the lower share price can attract more retail investors to a stock.

Should investors buy when prices fall?

From a valuation perspective, Super Micro trades at just a price-to-earnings (P/E) ratio of 14, based on analyst estimates for fiscal 2025. That’s pretty attractive considering revenue growth is expected to double next year. However, the company is in a low-margin business and thus shouldn’t command the multiple of a chip company like NVIDIA or a software company like Microsoft either.

SMCI PE Ratio (Forward) data from YCharts.

The company is currently experiencing tremendous growth as it capitalizes on AI infrastructure and data center expansion. However, it must also be a little concerning that its gross margins are so weak when demand for its products is so high. This is not an indication of a company with a wide moat or pricing power.

Given this fact, I would probably hold off on Super Micro at this point, even after the recent sell-off.