SMCI's Margin Compression Sparks Debate: Bullish Article vs. Cautious DeepValue Report

What happened

Super Micro Computer reported record Q2 FY26 revenue of $12.682B, driven by AI server demand, as highlighted in a Seeking Alpha article. However, gross margin plummeted to 6.3% due to expedite costs, tariffs, and $132.9M in inventory write-downs, revealing significant operational strain. The Seeking Alpha piece argues that this margin compression has caused the market to misprice the stock, citing a 42.9% EV/Sales discount and a buy rating with targets up to $62. In contrast, the DeepValue master report maintains a WAIT rating, emphasizing risks such as 62.6% customer concentration, negative operating cash flow of $(941)M over six months, and ineffective disclosure controls. This creates a narrative where AI-driven growth is weighed against persistent profitability and governance concerns.

Implication

SMCI must prove it can sustain high revenue while reversing margin compression and negative cash flow to justify a higher valuation. The Q3 guidepost of ≥$12.3B revenue is a critical test; missing it would undermine the AI demand narrative amid extreme customer concentration. Persistent inventory write-downs or lack of gross margin stabilization would indicate deeper operational inefficiencies that could cap profitability. Governance issues, with disclosure controls not effective, add a structural risk that may limit valuation multiples. Therefore, a prudent approach is to monitor the next quarter for signs of turnaround, aligning with DeepValue's cautious stance.

Thesis delta

The Seeking Alpha article introduces a bullish thesis that SMCI is undervalued due to temporary margin compression, suggesting a shift towards optimism based on AI demand and peer discounts. However, the DeepValue report does not alter its WAIT rating, as fundamental risks—including customer concentration, margin pressure, and cash flow issues—remain unresolved and are supported by recent filings. Investors should consider this divergence and prioritize observable improvements in financial metrics before adjusting their investment thesis.