Super-microcomputer (SMCI 1.39%) is one of the biggest winners of the artificial intelligence (AI) boom.

Even after the decline in recent months, Supermicro, as the company is also called, is still up nearly 700% since the beginning of 2023, reaching almost NVIDIA as the following graphic shows.

SMCI data from YCharts.

The company makes high-density servers that are particularly well-suited to running AI applications, and it has done so through Nvidia-like growth, with revenue increasing 144% in its recently reported fiscal fourth quarter.

In response to the share price increase, Supermicro recently decided to reward investors with a 1:10 stock split, effective October 1. The company said the shares will be split to make them more easily accessible.

Should you buy Super Micro Computer before the stock split? Let’s take a look at the evidence.

Image source: Getty Images.

Recent developments are mixed

There is no doubt that Supermicro is experiencing rapid growth, but the company’s balance sheet is also flawed, and that is one of the reasons why the stock plummeted after the recent earnings report. Gross margin has declined despite rising revenues. In the fourth quarter, the company reported a gross margin of just 11.2%, compared to 17% in the year-ago quarter. That also meant lower operating margins for Supermicro, which fell from 10.3% to 6.5%.

The good news is that the company expects gross margins to recover. While supply chain bottlenecks have pushed up prices for new components, this trend should ease next year. Management also said gross margins will benefit in the long term from lower manufacturing costs in Malaysia and Taiwan. The company also plans to expand in the Americas and Europe.

If margins recover next year, the stock should rise.

Will the stock split help?

Investors should be aware that a stock split does not change the fundamental value of a stock; it simply divides the proverbial pie into more pieces, making the individual shares cheaper.

There is also some evidence that stocks have performed better than S&P500 in the 12 months following their stock splits, according to a study by Bank of Americawhich found that stocks that are split gain an average of 25%, compared to only 9% gain for the S&P500This could be because stock splits typically follow strong share price momentum and are partly due to management’s confidence in the company.

However, at least some evidence seems to contradict these findings. For example, Nvidia, the stock leading the AI ​​boom and a close partner of Supermicro, did a 1:10 stock split on June 7. Since then, the stock has risen just 1.5%, just below the S&P 500’s 3.5%.

Chipotle The stock peaked just before the 50-for-1 stock split on June 26 and has fallen 21% since then.

Celsius Holdingsthe energy drink maker, has fallen 20% since its 3:1 split last November, and Broadcomthe network chip specialist, has fallen 3% since its 1-for-1 split on July 15, compared with a 0.5% decline in the S&P 500 over the same period.

Of course, a stock split is no guarantee of outperformance, even though stock splits have shown above-average performance on average in the past.

Should you buy Supermicro before October 1st?

Whether you’re investing in AI stocks or stock splits, the good news is that Supermicro’s price decline presents an attractive buying opportunity for the stock, which has fallen nearly 50% since its March peak when the stock was added to the S&P 500.

Super Micro Computer is currently trading at a price-to-earnings (P/E) ratio of 31, which seems like a bargain for a stock that still has plenty of growth potential and is expected to see increasing margins in the coming years.

Supermicro has a number of competitive advantages that should help it continue to succeed in the AI ​​server market, including a close relationship with Nvidia and expertise in high-density servers. In addition, the company is a leader in direct liquid cooling (DLC), a key technology for optimizing hardware performance. CEO Charles Liang recently said, “We aim to have 25-30% of new global data center deployments using DLC ​​solutions over the next 12 months, with the majority of deployments coming from Super Micro.”

The stock split alone is not a good reason to buy the stock, but given Supermicro’s strong growth prospects, attractive valuation, and larger, long-term opportunities in AI, buying ahead of the stock split seems like a brilliant move.