SMCI's Undervalued Narrative Clashes with Persistent Operational Risks

What happened

A recent article posits that Super Micro Computer trades at a deep discount of 0.5x forward sales, suggesting an underrated AI opportunity despite gross margin pressures, with the company expanding its customer and product mix for potential stabilization. However, DeepValue's master report highlights that SMCI's gross margins have compressed to ~9-11% due to competitive pricing, tariffs, and mix shifts, with FY26 revenue guided to at least $36B but subject to intense competition and customer concentration risks. The report further notes material internal control weaknesses, an adverse auditor opinion, and past guidance cuts, undermining governance credibility and earnings durability. While the article emphasizes valuation versus peers, it overlooks the operational headwinds, including working-capital strain from inventory builds and the potential for further margin erosion in a commoditizing AI server market. Consequently, SMCI's growth story remains fraught with execution challenges that temper any near-term optimism.

Implication

The bullish article's focus on SMCI's low sales multiple ignores critical fundamentals, such as gross margin compression to ~9% and unremediated internal controls, which heighten financial and reputational risk. DeepValue's analysis indicates that achieving the FY26 revenue target of at least $36B depends on successful Blackwell and MI350 ramps, but intense price competition from Dell and HPE could cap margin recovery. Customer concentration has increased, with four customers representing ≥10% of sales, amplifying revenue volatility and pricing pressure in large AI deals. Additionally, the company's balance sheet carries leverage from convertible notes and working-capital intensity, limiting flexibility if demand underperforms. Therefore, the implication is that investors should wait for evidence of margin stabilization above 9%, control remediation, and consistent revenue growth before reconsidering the stock, aligning with DeepValue's 'WAIT' rating and attractive entry at $25.

Thesis delta

The new article presents a contrarian bullish view on SMCI's valuation, but it fails to address the operational and governance risks detailed in the DeepValue report, such as margin compression and internal control weaknesses. This does not materially shift the cautious thesis, which remains centered on waiting for proof that SMCI can convert its AI order book into higher-quality earnings without further setbacks.