Why Investors Should Consider Super Micro Computer (SMCI)

Yesterday, Super Micro Computer (SMCI), the less talked about AI stock, lost around nine percent on the day and that trend seems to be continuing today with this morning’s premarket indicating an opening a couple of percentage points lower again. SMCI hasn’t received the publicity like the kind Nvidia (NVDA) has seen, but it has been a very popular AI play, with the stock having gained more than three hundred percent year to date before yesterday’s pullback.

It looked like a guaranteed winner for a while, so a two day drop of over ten percent has come as a shock to many and there are rumblings about the reason for it.

That reason is at least clear and obvious. Super Micro Computer is issuing two million new shares, thus diluting the value of existing holdings. I guess if you are someone who bought the stock up around $1200 a couple of days ago, that decision is a little frustrating. However, it is the right one for SMCI, and therefore by extension for the company’s shareholders. It is also good for the market overall.

One of the most frequently heard criticisms of the stock market is that it is essentially a casino, somewhere rich people play and, in doing so, create nothing except more money for themselves. The secondary market, according to its critics, has no other purpose. When a company first goes public, it is to raise capital, which is a useful thing. But, say those critics, the subsequent trading of that stock generates nothing of value for the company, its staff, or its customers. This is a clear example of why that is a false narrative.

SMCI has been driven higher by speculators and a lot of people have made a lot of money off of its rise, for sure. However, that rapid push up has made it possible for the company to raise a huge amount of capital with a relatively small share offering. Around $2 billion, in fact.

If that money were being used to give the c-suite big bonuses or buy a new corporate jet or something, that would be a problem, but of course it won’t be. The filing in which the offering was revealed says that "the principal purposes of this offering are to obtain additional capital to support our operations, including for the purchase of inventory and other working capital purposes, manufacturing capacity expansions and increased research and development (‘R&D’) investments."

Now, admittedly, “other working capital purposes” is a bit vague, but that is normal language in such a filing and the overall intention is clear: The capital will mostly be used to expand production and develop new products, both of which will be of long-term benefit to existing shareholders. That makes the drop in SMCI, while perfectly understandable in these circumstances, an opportunity to buy a stock that has been trading at a premium all year for a discount.

The big drop in SMCI will have come as a bit of a shock to pundits who included it in one of the “AI Stocks Not Named Nvidia to Buy Right Now!” articles that have been so popular recently and it will have resulted in some losses for traders who bought at the top. But the reason for the drop is a good thing. Raising capital to enable expansion is why the stock market exists, and in some cases that extends beyond an initial public offering.

SMCI’s management were right to do what they did. One could even argue that not issuing shares after a 300% plus gain in less than three months to finance expansion in a rapidly growing industry would have been a dereliction of the company’s duty to shareholders. While the decline may not be over just yet, the stock is a buy at these levels or lower on the basis that a rapid bounce back is quite likely before long. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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