Server and storage system manufacturer Super Micro Computer (NASDAQ: SMCI) has seen a remarkable surge, with its stock price soaring nearly 250% in 2023. While the company is riding high on the wave of artificial intelligence (AI), there are several reasons why I am choosing to steer clear of this data center and enterprise compute manufacturer for the time being.
1. Competitive Fallout in the AI Space
Super Micro has thrived in the realm of generative AI, earning significant revenue gains and an upgraded revenue guidance for 2024 in light of the burgeoning AI applications. However, this success does not occur within a vacuum. The company faces stiff competition from other key players such as Cisco Systems, Dell Technologies, Hewlett Packard Enterprise, Foxconn, and Inspur, all vying for their share of the AI pie. While Super Micro has carved out a niche for itself, the intense competition in this space is a cause for concern.
2. The Derivative Nature of Super Micro’s Growth
Despite its forward earnings growth, the majority of Super Micro’s success is contingent on the performance of its semiconductor design partners, such as Nvidia and AMD. While Super Micro’s stock may appear undervalued compared to its peers, its dependency on others for growth makes it a less compelling investment, given the inherent risks associated with such a derivative business model.
3. Limited Competitive Edge
Super Micro’s reliance on trade secrets and unpatented proprietary information, as highlighted in its financial filings, raises concerns about its ability to differentiate itself from competitors over the long term. The lack of patent protection exposes the company to potential intellectual property disputes and may position it unfavorably in the face of claims or litigation from competitors.