SMCI vs. IBM: Which Data Center Stock Is Better?

In this piece, I am evaluating two data center stocks: Super Micro Computer (SMCI) and IBM (IBM). A closer look leads me to establish a bearish view for Super Micro Computer and a neutral view for IBM.

Super Micro Computer (Super Micro) manufactures servers for cloud computing, data centers, big data, artificial intelligence, 5G, and the Internet of Things. It also offers other computer products, including energy-efficient computing technology. Meanwhile, IBM is of course a legacy computing giant that now offers servers for data centers and a wide range of enterprise software, networking equipment, and other computing needs.

Super Micro stock is still higher by 55% YTD after plummeting 52% over the past three months. The shares are also up 78% over the past year. On the other hand, IBM stock has soared 25% over the last three months, bringing its year-to-date return to 35%. Shares of ‘Big Blue’ have surged 53% over the last year.

(SMCI = green, IBM = black line)

Despite such different three-month performances, the respective valuations for Supermicro and IBM aren’t that far apart. We compare their price-to-earnings (P/E) ratios to assess their valuations against each other and that of their industry.

For comparison, the information technology industry is trading at a P/E of 44.5x, versus its three-year average of 67.9x.

Super Micro Computer

With a trailing P/E of 21.8x, Super Micro Computer is trading at a sizable discount to its sector. However, such a discount seems warranted given recent developments at the company. A bearish view seems appropriate, at least until things blow over and we receive some transparency into the situation.

A negative report on SMCI from short seller Hindenburg Research raised all sorts of red flags. The firm makes a variety of allegations against the company, including that it has manipulated its financials. Hindenburg alleged accounting issues along with undisclosed transactions between related parties, sanctions violations, and problems with export control. Short sellers benefit when a stock price plummets, so may be motivated to issue reports on the companies they’re shorting for that reason. However, on the other hand, Hindenburg Research has a pretty good track record, and was correct about fraud at Nikola (NKLA) in 2020.

Additionally, Super Micro has already had documented accounting violations in the past, having settled a previous case with the Securities and Exchange Commission in 2020 for $17.5 million. As a result, investors might want to steer clear of SMCI until additional transparency is available, especially after the company decided to delay the release of its annual report.