Is this stock split a buying opportunity or a trap?

Supermicrocomputer (NASDAQ:SMCI) It’s a pretty complicated investment at the moment. On the one hand, it manufactures server components and entire servers that are in high demand thanks to artificial intelligence (AI). On the other hand, there are accusations of accounting malpractice and a Department of Justice (DOJ) investigation looking into these concerns.

Right now, the bearish scenario outweighs the bullish, which is why Supermicro shares (as the company is known) have fallen 60% from their all-time high reached in March. Additionally, the company recently underwent a 10-for-one stock split, a catalyst that generally causes the stock price to rise, not fall.

So is this a stock we should stay away from? Or is it a chance to own an undervalued and potentially massive winner?

Supermicro product is at risk of being commoditized

Let’s start with the business itself – and there may be other concerns to consider here as well. The space for Supermicro products is now quite saturated as a result of many competitors.

However, Supermicro has an important advantage: it has the most energy efficient technology available. With energy being a significant operational cost for these servers, companies are considering the total cost of operating them. This is pushing huge demand for Supermicro.

However, this has its own problems. Supermicro’s gross margin collapsed due to its new liquid cooling technology as its supply chain suffered bottlenecks in key components of these new systems. Management expects its gross margins to increase throughout fiscal 2025 (ending June 30, 2025), driven by its customer mix and production efficiencies as it increases production in Malaysia and Taiwan, which should alleviate the bottlenecks it currently faces.

SMCI gross profit margin data (quarterly) by YCharts.

While this may be true, something else may be going on here. When a product becomes commoditized, the companies that manufacture it have to start reducing margins to compete. This could be happening to Supermicro’s business, which wouldn’t bode well for the company, even if it has best-in-class products.

This will be an important trend to watch next year, as a low gross margin could break Supermicro’s investment thesis.

Allegations of accounting malpractice triggered a government investigation

Then there are the allegations and the government investigation. Well-known short seller Hindenburg Research released a report in late August alleging account negligence at Supermicro, something for which the Securities and Exchange Commission already fined Supermicro $17.5 million in 2020. Although Supermicro management has denied these accusations, it did itself no favors when it announced that it was delaying filing its year-end 10-K form with the SEC the day after the publication of the Hindenburg report due to the evaluation of “internal controls over reporting financial”.

It’s worth remembering that Hindenburg is a short seller and therefore benefits when the share price falls. However, these allegations were serious enough for the DOJ to launch an investigation into Supermicro to determine whether they had merit. It will be some time before we know the results of this investigation, so investors have a difficult choice to make.

I wouldn’t blame anyone for throwing Supermicro into the “too hard to understand” pile. There is no shame in this conclusion. One of the greatest investors of all time, Warren Buffett, often does this with companies he doesn’t understand. With shrinking gross margins and an ongoing DOJ investigation, there are certainly a lot of negatives surrounding Supermicro.

But there are also some positives. In fiscal 2025 (ending June 30, 2025), Supermicro expects its revenue to grow between 74% and 101% year over year. It’s massive growth, but the share price is very cheap.

SMCI PE Ratio (Forward) data by YCharts

At just 14.2 times forward earnings, Supermicro might be one of the cheapest companies you’ll find, boasting growth rates like this. Therefore, if Supermicro’s management is correct and improves its gross margin and shows strong growth throughout fiscal 2025, the stock will have a huge advantage as it is far below where the S&P 500 trades (at 23.7 times forward earnings).

I think there’s a compelling enough investment thesis here that I bought the dip in the stock. However, I only let it take up about 1% of my portfolio as there is a lot of risk involved. Supermicro is all about risk tolerance and management. If you don’t agree with this stock losing money due to the potential for strong earnings, there are still plenty of other AI stocks that are great picks.

But there is a strong chance that this stock will double. if it solves some of its flaws.

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Keithen Drury holds positions at Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.