Super Micro Computer's Sales Growth Is Incredible, but This Could Be a Problem for the Stock
Super Micro Computer (NASDAQ: SMCI) has been a hot buy this year, but lately, the stock has been nosediving. In just six months, it has fallen by 27%. Its year-to-date return is still impressive at 90%, but it's clear that investors appear to be growing concerned with the stock potentially hitting a peak.
The company, also known as Supermicro, experienced a lot of growth due to artificial intelligence (AI) as businesses upgrade their servers and IT infrastructure. Supermicro hasn't been generating just double-digit growth; its top line more than doubled last quarter. However, revenue growth alone may not be enough of a catalyst to rally the stock much higher. Although Supermicro is coming off another strong period of growth, there's a more concerning number that investors may want to pay attention to: its gross profit.
Sales growth is great, but it isn't all that important if a company's cost of revenue is high. The higher those costs are, the less gross profit there is that's flowing through to cover overhead and operating costs. If margins aren't good, it may not necessarily result in better earnings numbers. That's ultimately a key reason why investors are bullish on fast-growing companies -- the assumption is that they will generate stronger profits, which improves their earnings multiples and can ultimately lead to a higher valuation for the stock.
Source Fool.com
