Every quarter, investment firms that manage more than $100 million file a form 13F with the Securities and Exchange Commission (SEC). I find the 13F to be a valuable tool because it breaks down in detail which stocks institutional investors are buying and selling, and it can be interesting to try and identify patterns among Wall Street’s biggest money managers.
One investor that I enjoy following is Jeff Yass, the co-founder of Susquehanna International Group (SIG). During the second quarter, SIG purchased roughly 5 million shares of artificial intelligence (AI) stock Super Micro Computer (NASDAQ: SMCI) — increasing its position in the company (also known as Supermicro) by 148%.
Below, I’m going to break down the mechanics of Supermicro’s place in the AI realm and address some important topics that should be considered when investing in the company.
Supermicro often comes up when semiconductor companies such as Nvidia or Advanced Micro Devices are mentioned. For this reason, many investors perceive Supermicro as another chip stock — but in reality, this isn’t exactly right.
Supermicro is an IT infrastructure business that specializes in designing storage architecture for Nvidia’s and AMD’s graphics processing units (GPU). So, while demand in the chip industry has direct influences on Supermicro’s operation, the company itself is not a true semiconductor stock.
Although Supermicro has undoubtedly benefited from AI tailwinds, the financial profile below paints a pretty sobering reality.
Namely, Supermicro’s gross profit margin is trending in the wrong direction. Despite consistent acceleration across the top line, Supermicro’s unit economics are pretty backward.
While management has said that these headwinds will be short-lived, the reality is that IT infrastructure is not a high-margin industry. This dynamic leads me to my next important topic: competition and the risk of commoditization.
While Supermicro has done a respectable job of fostering relationships with some of the world’s leading GPU producers, these relationships are by no means exclusive.
Supermicro competes with plenty of other businesses that offer IT architecture solutions, including Dell Technologies, Hewlett Packard Enterprise, Lenovo, and Cisco. These companies are much larger and more diverse than Supermicro, making them formidable rivals.
Broadly speaking, when the same solution is offered by many players within the same industry, companies become forced to compete on price. So, even though Supermicro’s management has been forecasting increasing operating profit, I question how profitable the company will ever become as competition heats up.
