2 Reasons Why SMCI Stock Soared 25%, And 1 Risk That Still Looms Large

Reason No. 2: Gross Margins Finally Rebounded

After several quarters of pressure, one encouraging sign for investors was improvement in profitability Adjusted gross margin rebounded to 10.1%, up from 6.4% in the previous quarter, and from 9.7% in the year-ago quarter. Adjusted earnings per share (EPS) also increased 171% YOY to $0.84 per share. Management credited this improvement to a better product mix, lower tariff and expediting costs, increased operational efficiency, and greater exposure to enterprise customers and higher-value infrastructure solutions.

Investors applauded the improvement, since one of the main concerns has been whether SMCI was compromising profitability to gain market share. However, management assured that the company can maintain a double-digit gross margin model over time as its business mix evolves toward enterprise infrastructure, software, and services. Notably, enterprise channel revenue reached $2.8 billion, accounting for 28% of overall sales and increasing by 46% YOY. Analysts expect revenue to increase by 83% in fiscal 2026, accompanied by 29% increase in earnings.

The One Big Risk

Despite its strong AI demand environment, SMCI’s balance sheet and cash flow pressures remain a risk that investors should not overlook. The company reported negative operating cash flow of $6.6 billion along with negative free cash flow of $6.7 billion as inventory levels and working capital requirements increased. Inventory increased to $11.1 billion from $10.6 billion in the prior quarter. The company’s cash conversion cycle also deteriorated sharply, rising from 54 days to 106 days quarter-over-quarter.

Negative operating cash flow means its core business isn’t generating enough cash to cover its day-to-day operations. And negative FCF implies that the company has nothing left after paying for operations. For a fast-growing company like SMCI, this will lead to the company borrowing debt, which is exactly what happened. Super Micro ended the quarter with $1.3 billion in cash but $8.8 billion in bank and convertible note debt. This resulted in a net debt position of $7.5 billion, over just $787 million in the prior quarter. While management believes these pressures are temporary, investors should keep an eye on whether the company can convert its enormous AI demand backlog into healthier and more stable cash generation.

Is SMCI a Buy Now?

Despite all the scandals, Super Micro’s Q1 showed meaningful progress in areas investors were most worried about, particularly margins, enterprise expansion, and recurring software and infrastructure revenue. However, the balance sheet risk remains substantial. For aggressive investors who believe AI infrastructure spending will continue to grow over the next several years, SMCI is a compelling long-term buy-and-hold stock. But conservative investors might want to see signs of improving cash flow stability before buying.

Wall Street also has a cautiously optimistic stance on SMCI stock rating it an overall “Hold.” Of the 19 analysts who cover the stock, three rate it a “Strong Buy,” two say it is a “Moderate Buy,” 11 rate it a “Hold,” one says it is a “Moderate Sell,” and two say it is a “Strong Sell.” The stock is trading above its average target price. But, the Street-high estimate of $50 suggests a potential 41.4% jump over the next 12 months.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com