Super-microcomputer (SMCI 0.34%) announced fourth-quarter fiscal 2024 results (for the quarter ended June 30) on August 6, and the stock fell 20% as investors were concerned about the company’s shrinking margin profile.

Supermicro’s revenue has grown significantly year-over-year, and its fiscal 2025 guidance suggests that the impressive growth will continue. In addition, management announced a 1:10 stock split that will take effect on October 1. Still, the fact that the company’s earnings of $6.25 per share fell far short of analysts’ expectations of $8.12 per share sent the stock reeling.

Will a stock split help turn Supermicro stock’s fortunes around?

A stock split is nothing more than a cosmetic move that does not change a company’s fundamentals, so it is not logical to expect Supermicro stock to skyrocket after this announcement when it has not met Wall Street’s expectations. A stock split simply increases the number of shares outstanding in a company by lowering the price of each share. The market capitalization remains unchanged.

An investor who currently holds one share of Supermicro stock – which trades at around $510 – will own 10 shares after the split, each worth $51. There is a belief that lowering the price of each share through a stock split makes stock ownership accessible to a wider range of investors, thereby increasing demand for a company’s stock.

With Supermicro stock rising phenomenally into early 2024, there was a possibility that the company could split its stock to lower the price of each share. But as we’ve discussed before, a stock split will have no impact on Supermicro’s growth prospects and is unlikely to pull the stock out of the lows it’s in (it’s down 44% since early March).

However, a closer look at the company’s recent results, forecasts, and valuation shows that buying this company after its sharp decline could be a smart move. Here’s why.

Supermicro’s rapid growth will continue

Supermicro ended fiscal 2024 with revenue of $14.94 billion and non-GAAP (generally accepted accounting principles) earnings of $22.09 per share. Revenue increased 110% year over year, while earnings rose 87%. However, the company – known for making server and storage systems – saw its margins decline in the last quarter.

Supermicro’s gross margin shrank from 18.1% in fiscal 2023 to 14.2% in fiscal 2024. This margin pressure is due to the investments Supermicro is making to increase the production capacity of its artificial intelligence (AI) servers, which are in high demand and are driving tremendous revenue growth. It is worth noting that 70% of Supermicro’s revenue last quarter came from the sale of its server solutions used to deploy graphics processing units (GPUs) for AI.

Not surprisingly, Supermicro is increasing its manufacturing capacity to capture a larger share of the AI ​​server market. For example, Supermicro is aggressively expanding production of direct liquid cooling (DLC) servers. That’s a smart move, as the liquid-cooled server market is expected to be worth $21 billion in 2029, up from $5 billion this year. This is due to their increasing adoption in AI data centers, which consume enormous amounts of power and generate a lot of heat.

The good news is that Supermicro management expects “near-term margin pressure to ease and return to normal before the end of fiscal 2025, particularly as our DLC (liquid cooling) and DCBBS (data center building block solutions) begin shipping in volumes.”

This explains why Supermicro expects another year of solid revenue growth in fiscal 2025. The company expects annual revenue to be between $26 billion and $30 billion, meaning it could double its revenue if it hits the high end of its guidance. In addition, the midpoint of the company’s first-quarter non-GAAP earnings guidance of $7.48 per share means its earnings will more than double from last year’s $3.43 per share, despite margin pressure.

We’ve seen that management expects margins to improve over the course of the fiscal year, so there’s a good chance the company could end the year with a significant jump in earnings as well. That’s why savvy investors would do well to take advantage of the dip in this AI stock, as it currently trades at just 14x forward earnings and 2x sales despite excellent revenue and earnings growth.

Both multiples are below the US technology sector’s average revenue multiple of 7.3 and earnings multiple of 42. Given the expected growth in the new fiscal year, Supermicro shares are therefore a clear buy at this point.