Recent advances in artificial intelligence (AI) have generated a great deal of interest among consumers and investors alike. The advent of generative AI early last year has also impacted companies at the forefront of this technology, driving their revenues and profits to new heights. This, in turn, has driven up the share prices of these companies as investors scramble to be at the forefront of the paradigm shift in the technology landscape. Nowhere is this more evident than Super-microcomputer (NASDAQ:SMCI)also called Supermicro, which provides servers with the computing power required for AI.

The company’s robust operating performance and consistent execution have propelled its stock into the stratosphere. Since the start of 2023, Supermicro shares have gained an incredible 650%, making it one of the top performers in the market. The rise has been fueled by triple-digit gains in revenue and earnings, thanks to insatiable demand for the hardware needed to process AI. In addition, since its IPO in mid-2007, the stock has risen from an offering price of $8 to nearly $617 per share as of Tuesday’s close, representing a gain of 7,612%.

On Tuesday, Supermicro first announced plans for a stock split in conjunction with its quarterly earnings. This announcement is sparking renewed interest in this AI company. Let’s look at the details of the upcoming stock split and what it means for investors.

The small print

Supermicro said in a regulatory filing that its board of directors had approved a 10-for-1 stock split, which it said would be “implemented by an amendment to the Company’s amended and restated certificate of incorporation,” which “will result in a proportionate increase in the number of authorized shares of common stock.”

As a result of this split, shareholders will receive nine additional shares for each share they own after the close of trading on Monday, September 30. Trading of the stock on a split-adjusted basis is expected to begin on Tuesday, October 1.

As usual, Supermicro shareholders do not need to take any action to receive the additional shares. Brokerage houses and investment banks will handle the transaction behind the scenes and the additional shares will appear in investors’ accounts. It is important to note that the process varies from brokerage house to brokerage house, as does the timing, so the additional shares may not appear. immediately on October 1st, as it may take hours or days for the newly minted shares to appear.

An illustration can help provide much-needed context to the stock split process. For every Supermicro share a shareholder holds – currently trading for about $620 per share (at the time of this writing) – investors will own 10 shares worth $62 each after the split.

Does a stock split even matter?

As the example above shows, a stock split does not change the total value of an investor’s ownership in the company. For example, it does not matter if you have one dollar bill or four quarters, since they represent the same amount of money. Likewise, Supermicro shareholders receive a larger number of shares at a proportionally lower price.

Even if the underlying ownership structure does not change, a stock split tends to boost shareholder sentiment. This is partly due to investor psychology, as the move represents a vote of confidence by company management that share price gains will continue.

There is also evidence that lower share prices can attract new investors and increase demand for the new, cheaper shares. While there is anecdotal evidence to support this claim, once the excitement surrounding the stock split dies down, investors’ focus shifts to the company’s business and financial performance, as this will ultimately determine future gains or losses in the share price.

Is Supermicro stock a buy?

While the stock split alone isn’t a good enough reason to buy Supermicro, the company’s track record provides plenty of evidence to suggest the server specialist is a buy. However, there are a few things to keep in mind.

In the fourth quarter of fiscal 2024 (ended June 30), Supermicro reported record revenue of $5.31 billion, up 143% year over year and 38% quarter over quarter. This resulted in adjusted earnings per share (EPS) of $6.25, up 78%. For comparison, analyst consensus estimates called for revenue of $5.3 billion and EPS of $8.07. So while revenue was above expectations, earnings fell far short.

CEO Charles Liang indicated on the earnings call that the deficit was due to a shortage of certain server components, which reduced first-quarter revenue by about $800 million, as well as a change in product mix. He went on to say that the manufacturing facility that will come online in Malaysia later this year will “help increase our profitability.” This seems to indicate that management sees the pressure on profit margins as short-lived. If that proves to be correct, not If this is the case, investors should be cautious.

The adoption of generative AI, which ultimately drives demand, is still in its early stages. The global AI market was valued at $2.4 trillion in 2023 and is expected to grow to $30.1 trillion by 2032, according to Expert Market Research, representing a compound annual growth rate of 32%. If Supermicro continues its long-standing track record, the company will be well positioned to secure its share of the resulting windfall.

Therefore, investors should not buy Supermicro stock based on the impending stock split alone. Rather, it is the company’s long-standing operational excellence, rapid share price gains, and solid financial performance that make Supermicro stock a profitable investment.

Furthermore, with a price-to-earnings ratio of less than two times forward sales, Supermicro is the definition of an attractively valued stock, especially given the tremendous opportunities ahead.

For this reason, Super Micro Computer shares are a buy.

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Danny Vena owns shares of Super Micro Computer. The Motley Fool does not own any of the stocks mentioned. The Motley Fool has a disclosure policy.

Super Micro Computer announces 1:10 stock split. What investors need to know. was originally published by The Motley Fool.