Supermicro's Recent Surge
Supermicrocomputer (SMCI) saw its stock price surge by over 15% yesterday, with the rally continuing into after-hours trading. This surge was triggered by an announcement that the company is currently shipping over 100,000 GPUs per quarter. While this initially sounds impressive, a closer look reveals a different story.
Supermicro doesn't manufacture GPUs. Instead, they produce servers designed to house these powerful processing units. Their announcement highlighted their ability to ship servers capable of accommodating 100,000 GPUs every quarter. While this capacity aligns with their previously announced monthly production capacity of 5,000 servers (including 2,000 with direct liquid cooling), the market reacted with enthusiasm that seems unwarranted.
Furthermore, the claim of shipping over 2,000 liquid-cooled racks since June doesn't hold much weight considering their existing production capabilities. Essentially, Supermicro is fulfilling its previously stated production targets. While positive, this doesn't necessarily justify the recent stock surge.
The question then arises: should you invest in SMCI? Despite the seemingly positive news, there's a significant red flag: their free cash flow. Over the past two years, while SMCI experienced a 100% revenue growth, their free cash flow plummeted by the same percentage. This discrepancy is primarily due to a massive investment in inventory, explained by the company as preparation for future demand.
While this explanation seems logical, it raises concerns from an investor's perspective. The success of this strategy hinges on fulfilling that projected demand. Until there's concrete evidence of a positive turnaround in their cash flow, the risk associated with SMCI remains high.
While some might argue that SMCI is undervalued based on its current market multiples and revenue projections, the uncertainty surrounding its future cash flow makes it a risky investment. Personally, I prefer to avoid such volatile stocks and opt for more stable options like Nvidia, especially when considering exposure to the AI boom.
Google's Looming Lawsuit
In other news, Google's parent company, Alphabet Inc. (GOOGL), experienced a 2.5% dip in its stock price yesterday. This dip came in response to news of a potential second antitrust lawsuit from the Department of Justice, targeting Google's search and advertising business.
While the potential dismantling of Google's empire might sound alarming, it's crucial to analyze the situation rationally. Google, even if divided, would still retain its core strengths and market presence. Hence, the lawsuit doesn't pose a substantial threat to the company's long-term prospects.
Furthermore, the Wall Street Journal's report suggesting a decline in Google's search dominance due to competition from platforms like TikTok and Amazon seems misleading. While these platforms have gained popularity, their impact on Google's core search business is debatable.
Amazon's growth in advertising revenue, as depicted in the report, doesn't directly translate to a decline in Google's market share. Both platforms cater to distinct search intents, with Google excelling in general information retrieval and Amazon dominating product searches. Attributing Amazon's success to encroaching on Google's territory oversimplifies the complex dynamics of the digital advertising landscape.
The report also fails to acknowledge Google's continued financial success, with consistent revenue and EPS growth despite various challenges. Moreover, Google's advancements in AI, particularly with its language model Gemini, position it competitively against rivals like ChatGPT.
In conclusion, while the headlines might paint a bleak picture, a deeper dive reveals that both Supermicro's surge and Google's lawsuit warrant a more nuanced perspective. As investors, it's crucial to look beyond sensationalized news and rely on thorough analysis and a long-term vision when making investment decisions.