-
The Smci call is still ongoing. Lots to unpick tomorrow. The stock is ranging 42-43 after hours. Confirmed filing will be on time without material adjustments. Company accept filing delay impacted current quarter but note, once filed they will resume very significant growth. Access to capital being the main reason. Without sec compliant books banks won’t lend. Reconfirmed margin expansion.
Overall happy with what I’m hearing. And please note, the investment committee last Monday approved an increase in Smci holding ‘by’ 20%. We purchased new shares Monday prior week for 26.
The guide for 2025 June y/end is 25 billion(2024 15b) with conservative estimates for the July 2025 year following of 40 billion (emphasise very conservative).
I think the company has redeemed itself and the next 6 months will reveal a lot more. We go into that period with considerable gains supported by low multiples. -
Over this morning i will post excerpts from the call(very long) and a lot of detail. Only when you get under the hood can you see interesting points. Like the special project they are working on but being subject to an NDA can't tell us yet what it's about. hmm either Meta Louisiana or Stargate. It's not Xai as there is no secret what's going in there.
-
I with then discuss margin and why it can only improve.
Why they are guiding 5-6b for this Q not $8 but will be running at 8-10 in the next 6 months.
How the non filing has wounded them temporarily
Why this company has a bright future and i believe the stock is undervalued -
I'm sure those with an agenda will write articles pointing out all the negatives they can think of. The reality is the non filing has hurt them on several fronts but the facts are:
It's done and dusted
They will file on time
Nothing has been found. There are no prior year adjustments incl 2024 year end(June)-Zero
There is a net $40M adjustment to Dec regarding an inventory provision but that is 100% normal. A provision or estimate is subject to assessment right up to filing date(no filing yet for the 10-Q) so clearly, looking at the figures now, management feel a larger impairment provision be applied. It's nothing of any significance and these movements normally roll Q to Q. It's non cash and could reverse in subsequent quartersThe bottom line is, our holdings have an avg cost of around $23 today and given the company's own 3 year target is $100B revenue with margins reverting to historical trends, that would suggest $10B net income. I like that margin of safety!
-
Ironically they found $46M in revenue which they should have recognised but hadn't-so much for cooking the books
-
A quick back story
Revenue/Operating income:
2020 $3.3B/86M
2021 $3.6B/124M
2022 $5.2B/335M
2023 $7.1B/761M
2024 $14.9B/1,266M
2025 $25BE/? Est and to June 2025
2026 $40B (guide) fiscal year starts 1/7/25As of today, Q1, Q2 quarterly filings (10-q) are outstanding today together with the 24 year end(june) 10-k
The company said last night -we will file by the deadline of 25 February. I have no concerns over this and am confident it will happen. This issue is put the rest.
The guide for Q1 and Q2 were in the 5-6B range. Pretty much flat as is the Q3 guide Jan-April. Why is that. There is no question the late filing caused some customers to delay projects, coupled with a technology shift from Hopper to Blackwell however this needs to be put into context. $15-$18B, $16.5B at the midpoint compared to all of last year(14.9) with one quarter remaining and if the full year guide is to be believed, that quarter needs to be over $7B and as high as $8.5B.Volume Blackwell has not been allocated yet(to them) but it's coming-I would also speculate that the company can't afford to buy a lot as they are preserving cash. The first chips always go to the hyperscalers anyway- to build what is called Big-Iron. The super powerful cloud provider systems. These will be Nvidia reference designs built by Foxconn. SMCI do not get involved in this business because it's very low margin. SMCI specialise in custom solutions-their designs, which run specific LLMs or designed to perform a specific task and naturally there is a different mix of CPU/GPU/DPU,HBM. SSD/DBX base command/DGC cloud/ spectrum X-it's complex
And often forgotten DLC is primarily a NEW data centre product because it is far more difficult to convert an old DC to liquid cooling that to install from a blank canvas. The company said, many new DC's are just about ready and that makes perfect sense. You don't build 1m sq feet in a quarter but we know many are coming on line this year.No filed accounts =no banks can touch you. Once they file late Feb they will have access to all the money they need. You can see how the late filing really did throw a spanner in the works. But ok, the stock is now on its knees and the question being, is the business permanently impaired-No it is not.
Margins are not great-they are ok but not 15%(they are 11-12). Why? It is clearly linked to 3 temporary factors.
-
The late filing and the added expense to investigate, mitigate and report on time. This could have cost them 30M extra spend.
-
Preparation for Blackwell. Significant R&D has been expended to prepare for the technology transition. But the offset revenue hasn't arrived in volume.
-
Silicon Valley(S.V)was expanded to 20MW of power to handle 1500 DLC racks per month (you need power to test run large clusters, a unique SM advantage-racks are shipped ready to run). Malaysia is their brand new campus. A lot of money has been invested there and if you look at output, S.V is at 55% capacity and Malaysia which just came online is at 1% capacity.
Think about that. A massive factory staffed by 1,000+ skilled engineers(preparing for DLC) making 1/100th of the capacity. Just keeping the lights on costs a lot of money. In accounting terms we would call this very poor operating efficiency and all this cost is going to hurt your margin! All fixed cost e.g $20M per quarter can't be absorbed by, at a guess $40M in revenue at 15% GM. Right there is a $16M loss and when you look at total revenue of $5B with a gross margin of 12% (600m) that is 2.7% which is what is hurting them, clearly.
Conversely when Malaysia starts firing this is where we get Operating Leverage and rather than it being a drag, it actually acts as a fly-wheel, creating super-normal margins.
OK-I think that is credible thought on why we are flat today. Now to the future.
Management is developing a 200Kw+ rack for a 'special customer' It can only be one of a small elite group. Who needs a 200Kw rack. A single rack which consumes 200Kw/hour is frankly, mind boggling. I would guess Meta. And they don't want one, they will require thousands of them. I would estimate a rack this dense will 100% be DLC and will pack 100+ GPU and 50 CPU and cost somewhere in the $5-6M range, maybe more. The company won't discuss it further as they have signed an NDA. If it's not Meta then it's the Stargate project. Both are massive.
Management said they lead the market in DLC; technological supremacy and capacity supremacy. This is correct. The best solution-a total DC solution including cooling, software and chip level management. And with at least 2,000 rack per month capacity and growing to 3,000 pm by June(with a goal of 5,000 within 12 months) if you want DLC you must be talking to SM! It is not difficult to understand, just 1k racks per month at 4-5M each is 4-5B/month. Today we are at $5B revenue per Q!
Given the stock price and company valuation($25B). Given what we know about margin and the demand we consider SM to be an excellent long term investment and whilst the stock will be volatile whilst the short interest and speculators 'gamble' when they start delivering(I believe in 3-4 months), fundamentals will take over.
-
-
I should also mention. SM always needed more funding. You can't take on a $10B project when you only have $4B of working capital. Today SM has no debt and $2B cash plus $3.8B in inventory. A very unleveraged balance sheet. Dell has a debt pile.
I just wanted to make the point that the late filing has nothing at all to do with the need to more capital. It only made getting it a lot more difficult. SM did amend the convertible notes last Q and gained +$700M from existing lendors but they will need quite a bit more. Maybe $2-3B more and they will likely use Equity in part. A bit of dilution isn't a concern. -
Few additional points.
DLC is the future for the simple reason, it saves up to 40% in electricity costs and electricity to run a massive DC costs billions annually. Today 30% of new data centres have chosen DLC. This is up from 1% last year. A massive increase. Demand is massive.
Super micro say they have 70-80% market share.
I would estimate, of known large projects:
Xai Colossus
Meta Louisiana
Stargate
Coreweave
and many many others we must be looking at demand in the 20k+ rack minimum, next 10-12 months. Just DLC and 70% of that is 14,000 racks. North of $50B. SM also have an air cooled rack business which is billions too. -
taken from the call transcript last night-CEO says, in his own words (english not first language)
Yeah, in last few years, our growth have been very strong, except our 10-K interrupt, right? So in that 4 months, 5 months, we suffered a 10-K impact. So, our growth will be slowed down. But we will fix 10-K filed in very soon. And cash flow won't be a problem anymore. So, the product is strong. Capacity here, customer is ready. So, I believe $40 billion forecast is a relatively conservative estimation.
......................................................This backs up the flat growth-they've been churning their working capital-banks won't lend, plenty of orders but can't meet them. The company is paralysed, a cashflow drought. To explain, the cash conversion cycle which is Inventory Oustanding + Sales Outstanding minus Payables Outstanding and to grow you need to either collect your receivables faster than you pay your creditors(not easy) or optimise ones inventory or borrow money. It's a lot easier when you have a big fat margin. Companies like this need ready access to debt and if you're non compliant you don't get much if any and if you do you pay a higher rate/fee.
I would expect all to be filed late next week. They’ll be the banks friend again. Remember even today they are highly profitable
-
Hi Steve,
Good to chat this morning. Really just posting here to reiterate that whilst we disclose our stock holdings in certain portfolios this does not constitute a recommendation or advice.
Regards
Adam
-
On Friday Dell leaked news of their imminent contract to work on Collosus-2. And immediately the rumour mill kicked off, suggesting a win for Dell is a loss to SMCI. False. The two companies co-built Col-1, yet, if you recall, back then, Dell tried to claim credit for it too-Musk publically corrected their statement.
SMCI made material contributions to Col-1 and it's common sense that as the two projects are linked, the same vendors will integrate the next phase-you don't change what works. There is a limited supply of DLC, globally and as we have discussed, Dell DLC is actually Foxconn DLC. By using two vendors, Musk can stand up Col-2 faster. It's that simple.
I would think it won't be long before we hear whether SMCI is working on Meta's new DC expansion-im sure they are. Meta are SMCI's biggest customer. And a reminder, Meta is deploying $65B this year on DC builds
-
Big drop late in the day ….still well up thou..any reason for the drop
-
It’s up 100% in 10 days. That’s not normal and I’m surprised it didn’t happen sooner-it didn’t fall though. It closed up 8% just not 17%. We invested in the company because we consider them a long term winner and the reasons why have been discussed in minute detail. The volatility if anything is a distraction and in time it will calm down.
-
-
From the above. Grok-3 has just been released(this week), with version 4 due in May 2025 using 200K H/B200. What is interesting is the planned ramp in scale.500K B200, 1 million B200 and 1 Million Rubin. All within the next 18 months. This is just one LLM of many leading scalers. At $50K a piece that's a lot of Blackwell and Rubin will be even more.
SMCI is a core supplier of Xai. Follow the crumbs -
We will hear from SM today one way or the other- either they file the 10-k/qs or they file an 8-k notifying of a further delay.
.