Why Supermicro is mopping up the floor with the competition

By Therese Poletti

Supermicro has strong relationships with chip makers like Nvidia, and some server innovations

Super Micro Computer Inc. appears to be mopping up the floor with the competition in the market for AI-dedicated servers.

Last week, Supermicro (SMCI) announced preliminary results for its December quarter that smashed expectations. The San Jose-based computer and server maker has gained more share in the slower-growing server arena, thanks to its partnership in providing servers built with Nvidia Corp. (NVDA) graphics chips, and also because of one of its big, unnamed customers. Analysts believe that customer is Meta Platforms Inc. (META). Last week, Meta CEO Mark Zuckerberg spoke in an Instagram post about plans to build more massive computer infrastructure to run generative AI, which includes 350,000 of Nvidia's H100 chips.

Hans Mosesmann, an analyst at Rosenblatt Securities, said he believes one big attraction for customers is Supermicro's ability to quickly deploy "liquid-cooled racks that uniquely fall into Supermicro's area of expertise: fast, innovative, green, many SKU's, U.S.-based, and Lego-like." Liquid cooling, a technique once used mostly in the supercomputer industry, cools multi-rack servers in a more energy-efficient manner than air cooling.

"Liquid cooling in the data center is a must-have for next-generation AI compute hardware," Mosesmann said in a note last week.

Since last Thursday's news of the company's preliminary boost to its revenue projection - to a tune of about $800 million at the midpoint - Supermicro's shares have soared about 40%. A spokesman for Supermicro declined to comment any further, saying the company is in a quiet period before its fiscal second-quarter results on Jan. 29.

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According to the most recent IDC data on the nearly $32 billion server market, Supermicro was the fourth-largest server vendor globally, after leaping ahead of China's Lenovo in the second quarter of 2023. It is also growing faster than the overall server market, which grew at just 0.5% in the third quarter of 2023.

While the two companies tied for No. 1 - Dell Technologies Inc. (DELL) and Hewlett Packard Enterprise Co. (HPE) (in a joint venture with H3C Group) - saw revenue growth fall by double digits in the third quarter, Supermicro saw 12.6% revenue growth, according to IDC, which has not finished compiling fourth-quarter data yet.

The only other company among the top five server makers that saw third-quarter growth was No. 3 IEIT Systems Co. Ltd. (CN:000977) of China, which rose 24.9%, IDC said.

Supermicro often touts is close relationships with chip makers in Silicon Valley, namely Nvidia, but also Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD), companies it has been working closely with since it was founded in 1993, the same year as Nvidia. Last year, Supermicro Chief Executive Charles Liang and Nvidia CEO Jensen Huang shared the stage and talked about high-performance computing and AI data centers at Computex in Taiwan, showcasing Supermicro server racks running Nvidia GPUs.

Also read: AI has given boost to the stock of this lesser known Silicon Valley computer maker

But Wedbush Securities analyst Matt Bryson issued a word of caution about Supermicro after its news of a big upside surprise. He noted that the company's earnings forecast implies just flattish operating margins, assuming no unexpected charges in the quarter, and that the magnitude of the news will depend on the details.

"This result could suggest some gross margin deterioration asopex (beyond sales commissions) typically wouldn't scale immediately with higher revenues," Bryson said in a note to clients Friday. He wondered if the possibility of lower gross margins was the result of making inroads into a new type of customer base, such as hyperscalers like Meta Platforms.

Many eyes will now be watching Supermicro's quarterly results next week, as they debate whether the recent run-up in its stock price was worth it.

-Therese Poletti

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01-22-24 1953ET

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