Investing.com — Shares of Super Micro Computer, Inc (NASDAQ:SMCI) were down on Wednesday following a downgrade from Barclays.

Super Micro Computer shares were down 3% in pre-market trading at 8:18 am (1214 GMT)

Barclays’ analysts have raised concerns about SMCI’s future prospects, prompting a downgrade to an equal weight rating and a revised price target of $438. This is mainly due to the company’s declining gross margins, persistent customer losses, and issues with internal controls.

One of the key factors behind the downgrade is SMCI’s recent performance in terms of gross margins. In the June quarter, the company’s overall gross margin fell significantly to 11.3%, marking a 430 basis point decline from the previous quarter.

The gross margin for AI servers was reported to be in the high single digits, while Dedicated Liquid Cooling (DLC) server margins were even lower.

“MCI has been giving away DLC components for free to match or price below the air-cooled rack pricing provided by Dell (NYSE:DELL),” said analysts at Barclays.

The pricing strategy, combined with supply chain constraints, has pressured margins, leading to concerns about potential P/E multiple compression and diminished investor confidence.

“SMCI has been ceding shares in its top two customers: Musk entities and Coreweave (private, not covered, except for TSLA),” the analysts said.

Previously, SMCI had an exclusive supplier relationship with Musk Inc., but recent developments have seen the business split evenly between SMCI and Dell.

This shift has resulted in a drop in SMCI’s market share, to around 50% by June 2024 from 100% in 2023. Coreweave, another major customer, has also reduced its reliance on SMCI, a trend analysts attribute to improved GPU supply and Dell’s strengthened competitive position.

Adding to these challenges is the uncertainty surrounding the new GB200 server platform. Barclays’ analysts worry that SMCI might hold a smaller market share in GB200 servers compared to its position with Hopper-based servers.

The expected lower margins for GB200 servers could further pressure SMCI’s profitability. Additionally, the absence of definitive customer orders for the GB200 platform exacerbates the uncertainty, especially as competition heats up and margins could potentially shrink.

Another concern for Barclays is SMCI’s internal controls and corporate governance. The delay in filing the 10-K report has raised red flags, highlighting issues related to transparency and governance. SMCI’s lack of detailed financial disclosures, including quarterly order intake and backlog, has been a point of contention.

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The company’s past history with regulatory issues and its previous delisting from Nasdaq have only intensified these concerns.

In light of these factors, Barclays has adjusted its price target for SMCI to $438, using a valuation multiple of 12x FY25E EPS of $36.48. This new target aligns more closely with Dell’s valuation multiple, reflecting a more cautious stance given the current margin trends and internal issues.

While Barclays remains optimistic about the long-term prospects of the AI sector, it has identified Flex (NASDAQ:FLEX) as a preferred alternative investment. Flex’s increasing involvement in switch tray and power components for GB200 systems, along with its gains in Google (NASDAQ:GOOGL) TPU server assembly, makes it a more attractive option in the current environment.

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