Jahanara Nissar

The Company filed an 8-k Friday after market close – the NASDAQ has granted its request for an extension for filing the necessary 10-K and 10-Q documents. The company has until 2/25/25 to file the documents and will remain listed on the exchange while it prepares the documents under the supervision of its newly appointed external auditor.

Does this 8-k bring down the curtain on a drama that started three months ago when the company announced a delay in filing its 10-K? Possibly. Three weeks ago, in the face of the Street giving high odds for a stock delisting event, we rolled out a $45 PT and opined that odds of delisting were not quite as high as many thought. Our view was based on belief that SMCI held a uniquely critical position in the all-important business of installing AI infrastructure (link). Delisting the stock would cut off access to capital and result in impaired progress in AI data center build out. We also opined that the odds of alternatives such as DELL picking up share from SMCI were not quite as high as many thought. We called for the run-up in DELL on investor expectation of significant gains in AI infrastructure to fade (link).

In the past few week SMCI picked up steam as positive headlines began to hit the tape. With the 8-k filing on Friday, the stock cut above our PT in after-hours action. We are now raising our PT from $45 to $60 based on the expectation that, with the NASDAQ decision in hand, many investors are likely to return. Some brokerages which dropped coverage are likely to reverse their decision.

Are there knotty legal issues involved with the delay in filing? We will not know until the agencies rule on the matter. There is no guarantee that the company will be able to file the documents by the appointed date to the satisfaction of the external auditor and the stock exchange. However, for the next 2+ months, until the filing deadline in February, the event-driven volatility is likely to wind down while investors turn their focus to company fundamentals. And that is reason enough to raise our PT.

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In the recent 3-month period of extreme volatility, investors had an opportunity to pick up the stock at deep discount. Many on the Street were doubtful whether the company could avoid de-listing. In anticipation of delisting, investors believed that AI infrastructure build-out could continue with the involvement of other players such as Dell and Foxconn. We note that SMCI has had nearly 100% share of the liquid-cooled GPU server market in the US.

Event-driven call: Three weeks ago, we made a call that SMCI’s role in the industry was central enough that the AI ecosystem would be forced to come together and find a solution to SMCI’s regulatory woes. Delisting would trigger potential loss of access to financing and incur inability to participate in the capital-intensive infrastructure business. We made a call that the regulatory authorities would give SMCI the benefit of the doubt and allow it to remain listed while the company prepared the 10-K/10-Q documents (link). With this in mind, and with the stock trading at ~$21, we rolled out a PT of $45 based on 15x to our below-consensus FY25 estimate of $21.7bn/$2.93. Soon thereafter, the company announced the appointment of an external auditor. We reiterated our $45PT call (link).

Fundamental call: Besides the event-driven call, we made a fundamental call as well. We called for the run-up in DELL into its earnings event to fade. Investors assumed that the revenue shortfall reported by SMCI at its Q1 earnings even would show up as gains at DELL. It didn’t. DELL too missed its Q4 revenue expectations by over a billion dollars, in part due to its inability to ramp Blackwell shipment. Dell management said Blackwell orders had gone into backlog. However, DELL’s backlog increased by less than a billion $s q/q, hardly enough to signal it had picked up the baton from SMCI. DELL sold off hard after earnings. HPE too, at its recent earnings call, did not indicate it was stepping in to fill a potential hole being left behind by SMCI.

Raising price target: We are raising our PT from $45 to $60 based on 20x to our unchanged FY25 eps estimate. With the prospect of delisting now fading further, we expect many funds to return to the stock and some of the brokerages to resume coverage. And secondly, the recent earnings results at DELL and HPE show that they are not likely to pick up the slack if SMCI were to fall by the wayside. We think it may have become apparent to investors that SMCI holds a unique position in the Gen AI infrastructure industry, in the business of setting up data centers with tens of thousands of liquid-cooled GPUs at scale.
KC Rajkumar