Every Super Micro Computer stock investor should keep an eye on this number

Super microcomputer (NASDAQ:SMCI) the stock is still up more than 1,000% over the past three years, thanks to growing demand for its high-performance, artificial intelligence (AI)-driven rack servers. Its stock price is also down 66% from its peak earlier this year.

While a wide range of factors will play a role in shaping the server specialist’s future stock performance, investors should pay particular attention to one key metric.

Gross profit margins will be at the heart of Supermicro’s stock performance

Gross profit is calculated by subtracting the cost of producing a product from the revenue generated from the sale of that product. Gross profit margins are a key indicator of pricing power and have a major impact on a company’s overall profitability. Notably, Supermicro’s gross profit margins have recently been on a downward trend.

SMCI Gross Profit Margin Data (Quarterly) by YCharts

The company’s gross margin fell to 11.2% in the fourth quarter of its 2024 fiscal year, which ended June 30. This performance was down from a gross margin of 15.5% in the third quarter of last year and a gross margin of 17% in the fourth quarter of last year. 2023.

Supermicro’s high-performance rack servers are built around high-performance graphics processing units (GPUs). Nvidia and equipment from other suppliers. On the heels of rising sales and margins driven by AI-related demand, the reliance on third-party hardware may have paved the way for a contraction in gross margin.

Supermicro leverages strong pricing power and differentiates its products using liquid cooling technologies. Packing and running a group of high-power GPUs and other hardware together can generate a lot of heat, and overheating can lead to system crashes and permanent hardware damage.

If Supermicro’s server liquid cooling technologies prove to be a major selling point, it could strengthen the company’s gross margins and generate strong stock performance. Otherwise, competitive pressures and moderating demand could depress the company’s gross margins and share price.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool Ranks and Recommends Nvidia. The Motley Fool has a disclosure policy.