SMCI's AI Factory Expansion Highlights Growth, But Margin and Governance Risks Undermine Upside

What happened

A Motley Fool article highlights Super Micro's deepening role in Nvidia's AI factories, suggesting potential revenue acceleration from the AI server boom. However, the DeepValue report reveals SMCI's gross margins have compressed sharply from 18.0% in FY23 to ~9-10% recently, due to competitive pricing, tariffs, and mix shifts toward costly liquid-cooled racks. Critical risks persist, including customer concentration with four accounts now over 10% of sales, an adverse internal-control opinion from auditor BDO, and intense competition from Dell and HPE eroding pricing power. While the Nvidia partnership could support the guided FY26 revenue of at least $36B, margin recovery remains uncertain and is essential for converting top-line growth into durable earnings. Therefore, despite optimistic narratives, SMCI's stock performance depends on proving it can stabilize margins above 9-10% and remediate governance weaknesses in the near term.

Implication

Short-term, the news reinforces SMCI's position in AI infrastructure, but stock appreciation hinges on margin recovery, which faces headwinds from price competition and tariffs. If gross margins stay below 9%, the bear case valuation of $24 per share becomes more probable, threatening downside from current levels. Key monitoring points include quarterly gross margin trends, conversion of the $13B+ Blackwell order book into revenue, and updates on internal-control remediation in upcoming filings. Governance overhangs, such as the adverse audit opinion, could deter risk-averse customers and limit multiple expansion, increasing volatility. Thus, a wait approach is prudent, with better entry opportunities emerging after evidence of sustained margin improvement and control fixes over the next 6-12 months.

Thesis delta

The article underscores SMCI's growth opportunities through Nvidia partnerships, but it does not address the critical margin compression and governance issues central to the DeepValue thesis. The investment thesis remains unchanged: investors should wait for proof that SMCI can achieve gross margins rebounding above 11% and resolve internal-control weaknesses before considering entry, as current valuations already price in growth without adequate margin safety.