SMCI's Blowout Earnings Highlight Growth but Mask Persistent Margin and Cash Flow Woes

What happened

Super Micro Computer delivered strong FQ2 2026 results, beating revenue and EPS estimates with robust guidance, leading to a 7% post-earnings rally and bullish sentiment about its undervaluation. However, the DeepValue report reveals that SMCI's gross margins have compressed to ~9-10% with operating cash flow deeply negative at -$918 million in Q1 FY26, driven by competitive pricing and high working capital needs. Despite over $13 billion in NVIDIA Blackwell orders supporting a FY26 revenue floor of $36 billion, customer concentration is rising, internal-control weaknesses persist, and the stock trades at a premium ~27x P/E. The Seeking Alpha article emphasizes growth and valuation metrics like forward P/S below 0.5, but this overlooks the structural profitability challenges and governance risks highlighted in filings. Thus, while demand remains strong, SMCI's investment case hinges on tangible improvements in margins and cash conversion, not just top-line performance.

Implication

The blowout earnings reinforce SMCI's leverage to AI data-center capex and support the base case for hitting $36 billion in FY26 revenue, but they do not address the core profitability drag from intense competition and operational inefficiencies. With gross margins stuck near 9-10% and operating cash flow negative, the company's ability to generate sustainable returns is questionable, increasing reliance on continued explosive demand to offset thin economics. Valuation at ~$32.5 per share leaves little margin for error, as the DeepValue report assigns a base case value of $35 and bear case of $25, suggesting limited upside without margin recovery. Key investment triggers, such as two consecutive quarters of >10% gross margin with positive operating cash flow, remain unmet, keeping the WAIT rating intact. Therefore, investors are better off waiting for a lower entry point or clear evidence of economic inflection before committing capital, as current risks outweigh the bullish growth narrative.

Thesis delta

The strong FQ2 earnings confirm robust demand and support the revenue growth leg of the thesis, but they do not shift the core investment call, which remains contingent on margin and cash flow improvement. No material change has occurred in SMCI's structural challenges, such as customer concentration or internal-control weaknesses, so the WAIT rating persists until profitability metrics show sustained recovery.