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When a stock is in the midst of a freefall, it can be a risky time to buy. That’s because it’s hard to know if it’s bottomed out or if it’s heading further down. It may seem like a cheap purchase, but if the company is in trouble, it may still not be worth investing in.
Super microcomputer (NASDAQ:SMCI) was once considered a top stock in artificial intelligence (AI). Its servers are in high demand from companies looking to upgrade their technical capabilities, and it also provides companies with crucial IT infrastructure. But in the past six months alone, the stock, also known as Supermicro, has fallen more than 60%. Investors seem like they can’t get rid of the stocks fast enough.
But it could be that Supermicro is coming stock split help turn around fortunes and send stocks soaring again?
What Supermicro’s 10-for-1 split means for investors
Last month, Supermicro announced it would split its shares on a 10-for-1 basis. And on October 1, the stock will begin trading after the split. That means that instead of trading at around $400 per share, the stock price will be around $40 – assuming the price doesn’t change much from where it is now.
For investors, that’s about the most important difference they’ll see. In your portfolio, your total investment value will remain unchanged, you will simply have 10 times as many shares and the price will be one-tenth of what it was before the split.
But at a lower price, some investors may be more inclined to buy shares of the company if, for example, they can’t own fractional shares, or if they simply prefer not to. Beyond that, however, there is no clear benefit to a stock split; it’s just a superficial change that shouldn’t affect your decision to buy or sell Supermicro stock. Unless some drastic major news comes out on October 1, AI stock will buy as good or bad as it did the previous trading day.
Investors should focus on the fundamentals
What should always remain the focus for investors are the fundamental factors. Whether the company is growing quickly, whether it is profitable and how strong its cash flow is are some of the most crucial things to look at.
Even the recent short report on the company is not important. These reports can be biased and misleading and are often wrong on many, if not all, counts. While stock splits and short reports may have temporary impacts on a stock’s price, they are unlikely to determine how a stock performs in the long term.
Supermicro has been a strong growth stock this year due to the strength of its business and the high demand for its servers and other IT infrastructure. One concern, however, was the low gross margin. Without higher margins, Supermicro’s revenue growth might not translate into a much stronger bottom line, and that could make the stock look expensive if the share price rises but earnings per share don’t rise significantly.
It’s these kinds of things that investors should factor into their decision-making process, as opposed to stock splits or short reports.
Should You Buy Supermicro Stock?
Investors shouldn’t be hesitant about Supermicro stock because of the recent short report, but they shouldn’t be too excited about a stock split either. Although business is booming and Supermicro’s revenue has doubled in recent periods, I would wait a few quarters to see how the company fares and whether margins improve before making a decision on the stock. If they don’t improve, I’d leave the stock as low gross margin could be a concern.
But if you’re willing to take some risk and trust the company can solve these problems, it could be worth adding the stock to your portfolio as it trades at a fairly low 11 times estimated forward earnings traded. That’s an incredibly low multiple for a tech stock, and it could justify taking the risk, as the upside could be huge if Supermicro proves its doubters wrong. This isn’t a stock that will suit risk-averse investors, but if you have a high risk tolerance it could be worth buying today; you don’t have to wait until October.
Should You Invest $1,000 in Super Micro Computer Now?
Consider the following before buying shares in Super Micro Computer:
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.
Should You Buy Super Micro Computer Stock Before October 1? was originally published by The Motley Fool