Shareholders of Super Micro Computer, Inc. (SMCI.US) beware: double attack of equity dilution and debt pressure coming.

Seeking Alpha analyst Bashar Issa detailed the recent market dynamics of Super Micro Computer, Inc. (SMCI.US). He pointed out that Super Micro Computer, Inc. has achieved two out of three key catalysts by successfully hiring a new auditor and extending the deadline for the submission of audited quarterly and annual performance reports to February 25, 2025, after gaining approval from NASDAQ. The series of positive developments have pushed the company's stock price up by 73% since then. However, the third catalyst - a favorable conclusion to the Department of Justice investigation - has not been reached yet, and Super Micro Computer, Inc. still faces a series of challenges on its path to full recovery. It is reported that Bashar Issa detailed the three major catalysts that Super Micro Computer, Inc. is about to face in a previous article. The first is that Super Micro Computer, Inc. successfully persuaded NASDAQ to extend the deadline for submitting its annual report, effectively alleviating market concerns about the company's delisting risk, which in turn triggered a significant rise in the stock price. Secondly, Super Micro Computer, Inc. quickly hired a new auditor and is expected to eventually release its annual report, which is likely to address current compliance issues and have a positive impact on the company. Lastly, Super Micro Computer, Inc. needs to address issues related to the Department of Justice investigation and find a clear path to restore NASDAQ compliance, which will significantly boost market confidence. Although Super Micro Computer, Inc. has been a significant beneficiary of the artificial intelligence (AI) boom and global tech trends, with sales doubling from $7.1 billion in June 2023 to $14.9 billion in June 2024 within just 12 months, the company still faces multiple challenges. On one hand, despite relatively low capital requirements, Super Micro Computer, Inc. is actively raising funds through equity and debt markets. In the nine months ending in June 2024, the company raised $2.5 billion in equity funding while debt increased from $100 million to $1.7 billion. It was reported that this month, Super Micro Computer, Inc. is in talks with Evercore to raise more cash. However, this fundraising activity has raised questions from investors about its cash cycle management. These signs clearly point to issues in SMCI's cash flow management, especially related to inventory accumulation associated with sales growth. The lack of detailed profit margins and profitability reports makes it difficult for investors to discern whether SMCI is pursuing sustainable profit growth or simply expanding market share at all costs. It is worth noting that while Dell Technologies, Inc. Class C (DELL.US) and Hewlett Packard Enterprise Co. (HPE.US) have the same business capabilities as Super Micro Computer, Inc., Super Micro Computer, Inc. has become a significant beneficiary of the market boom in the AI server rack supply sector, particularly in terms of price competition. On the other hand, despite significant sales growth, Super Micro Computer, Inc.'s market share has declined, and profit margins are gradually shrinking. For example, Super Micro Computer, Inc. has not disclosed the audited financial statements for the three months ending in September 2024 (the first quarter of the 2025 fiscal year). However, based on a press release issued last month, the company expects sales for that quarter to range from $5.9 billion to $6.0 billion, representing a nearly 180% year-on-year increase, compared to a growth of 11% in the fourth quarter ending in June 2024, reporting $5.3 billion. While this growth data is encouraging, it still falls below the previously estimated range of $6.0 billion to $7.0 billion. More notably, despite achieving double-digit sales growth, Super Micro Computer, Inc.'s market share appears to be shrinking. For instance, NVIDIA Corporation's AI data center sales, a key indicator of the market, increased by 17% over the three months ending in October 2024, exceeding SMCI's 11% growth rate. Similarly, Dell Technologies, Inc. Class C's data center sales surged by 58% to $7.4 billion in the three months ending in November 2024, while Hewlett Packard Enterprise Co.'s technology reported a 32% increase in server sales during the same period. Combining the trend of SMCI's expected sales decline in the three months ending in December 2024, these data all indicate that SMCI's market share is being eroded. Super Micro Computer, Inc.'s current unaudited profit margin is 13%, showing a certain level of stability, but the company expects the margin to reduce to 12% in the next quarter, reflecting increased market competition. In terms of valuation, Bashar Issa pointed out that despite Super Micro Computer, Inc.'s expected price-to-earnings ratio (based on Wall Street's forecast non-GAAP earnings per share of $2.8 for the twelve months ending in June 2025) being 11.The price-to-earnings ratio may seem attractive, but considering the expected decrease in sales, loss of market share, declining profit margins, uncertainty of a Department of Justice investigation, and the risk of delisting if an audit report is not submitted by February 2025, the company's valuation is not actually undervalued.On the other hand, Micron Technology (MU.US), a well-managed supplier of LPDDR5 and HBM3E memory chips, has an expected P/E ratio of 14 times, while blue-chip companies and leading server supplier Hewlett Packard Enterprise Co. (HPE.US) has a trading P/E ratio of 10 times, and Dell Technologies, Inc. Class C (DELL.US) has an expected P/E ratio of 14 times. While the P/E ratios of some companies are higher than Super Micro Computer, Inc., considering the growth premium being stripped from Super Micro Computer, Inc. (especially considering its forecasted sales decline in the second quarter of 2025), this valuation still falls within the peer average range. Bashar Issa expressed a cautious attitude towards the future development of Super Micro Computer, Inc. in the article. He pointed out that although the main factor driving the short-term stock price increase is whether Super Micro Computer, Inc. can successfully submit delayed audit reports, in the long run, the ongoing Department of Justice investigation and the endless need for cash by the company raise doubts about its cash cycle management. Even if Super Micro Computer, Inc. successfully submits audit reports by February 2025, the road to full recovery is still full of uncertainties. It is worth mentioning that in the recent earnings conference call, the management disclosed to shareholders that their earnings per share forecast is based on 650 million shares outstanding, which is 100 million more than the number of outstanding shares mentioned in the June 2024 quarterly report. Earlier this month, the CEO of Super Micro Computer, Inc. expressed a firm confidence in the company's ability to avoid delisting from NASDAQ. However, whether this optimism is justified remains to be seen. It is undeniable that Super Micro Computer, Inc. is facing market share losses and profit margin reductions, and equally serious is the constant dilution of shareholders' equity and accumulation of more debt.