By Mackenzie Tatananni

As Super Micro Computer faces off against formidable competitors in the artificial-intelligence server market, analysts at BofA Securities don't expect the stock to see outsize gains soon.

Analysts led by Ruplu Bhattacharya resumed coverage Wednesday on shares of the embattled server maker with an Underperform rating and a $35 price target. The stock was up 0.5% at $50.26 on Thursday.

While revenue growth can be high, this comes at the expense of margins, the BofA team said. Super Micro has manufacturing scale and the ability to snap up further market share -- but the company's gross margin has been on the decline, falling from 18% in fiscal 2023 to 13.9% in fiscal 2024. BofA predicts it will drop even further to 11.3% in fiscal 2025 and reach 9.4% by fiscal 2027.

Super Micro has previously acknowledged margin pressure. Chief Financial Officer David Weigand said on the company's latest earnings call in May that a combination of tariff uncertainty and the transition from Nvidia's Hopper and Blackwell graphics processing unit systems "drives a little bit more prudence in setting margin expectations."

The company's competitive positioning is also at risk, according to BofA. Liquid cooling gave Super Micro an advantage when the server maker introduced it in 2021, becoming an early adopter of the technology.

But rivals have since stolen its thunder. Hewlett Packard Enterprise announced in February that it was shipping its first Nvidia GB200 NVL72 rack, which is specialized to train AI models and has a liquid-cooled design. The company claims to have "five decades of liquid cooling expertise," BofA pointed out.

The BofA team believes liquid cooling will likely become commoditized in the near future. "For large projects, vendors may need to offer this free as an incentive to win," the analysts added.

Competitors like Dell Technologies are making it increasingly difficult for Super Micro to retain its competitive edge. BofA noted that Dell recently became a supplier for CoreWeave and xAI, two of Super Micro's largest clients historically. The analysts predict that Dell will not only reach AI server market share similar to Super Micro in 2025, but gain even higher share in years to come.

Analysts with KeyBanc Capital Markets raised a similar point last week, saying that Super Micro's growth forecasts were unachievable, "given we have seen competitors such as DELL get wins with key customers such as xAI."

In BofA's view, both Dell and HPE are "better positioned in the Enterprise segment" than Super Micro.

Other risks add to the firm's bearish thesis. Super Micro's revenue depends on the company's ability to purchase all components needed for a complete server or storage system and then configure, test, and ship the product. Revenue has been impacted by limited availability of some components in past quarters.

Super Micro isn't the only one feeling the pressure. "Availability of components will be an issue faced by all competitors in the AI server space," the BofA analysts wrote, noting that supply of graphics processing units continues to lag demand for the latest generation of processors.

Super Micro also must also deal with its lasting legal woes. Although the server maker regained compliance with Nasdaq listing requirements on Feb. 25, it isn't in the clear just yet. Auditor BDO USA cited material weakness in internal controls related to financial reporting as the company was nearly delisted from the index.

There's more uncertainty to contend with, BofA noted. Super Micro remains under investigation by the Justice Department in connection to allegations from a short seller in August 2024.

Super Micro dismissed the short report as containing "false or inaccurate statements" and said that it included "misleading presentations of information" that had been publicly disclosed. The company has obeyed requests to turn over documents, and no charges were brought as of the date of the filing of its latest annual report.

Challenges loom ahead, and the AI server market is too crowded to take chances. "Overall, we believe Super Micro's past issues and volatility warrants some discount as we currently view Super Micro as a show-me story," the BofA team wrote.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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July 10, 2025 11:38 ET (15:38 GMT)

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