Super Micro Computer Hasn’t Found Bottom Yet (Technical Analysis) (NASDAQ:SMCI)

SMCI corrected for more than 40%

Super Micro Computer (NASDAQ:SMCI) has suffered a correction of more than 40% off its peak prices recently, as seen in the chart below. The stock reached an all-time high of ~$1230 per share in March this year. The stock then has been under selling pressure (together with many cyclical stocks in the semiconductor industry). The sell-off worsened last week when the company broke its previous practice of providing preliminary earnings guidance. This has been interpreted as a negative sign by the market and raised concerns among investors.

Against this background, many potential investors may be contemplating some bottom fishing here. And it is the goal of this article to argue that the stock has not found a bottom yet. In the remainder of this article, I will make my argument based on both technical analyses and fundamental considerations.

Technical signs

I will start with the technical signs. I will use the price-volume chart below to argue why SMCI stock is still in a downward trend and has not found a bottom yet. First, its price has been consistently making lower highs and lower lows since its peak in March 2024. This is a classic sign of a downtrend. Secondly, its current price is far below the near-term moving average, another classic sign of a downtrend. For example, its 20-day moving average currently sits around $940, compared to its market price of ~$700.

The most important sign, in my view, is the trading volume information. The yellow box in the chart highlights the price ranges that have attracted the largest cumulative trading volumes recently (roughly since Feb 2024) as seen. These price ranges were between $950 to $1000 and formed a support level in my view given the large trading volume. The stock price has definitively fallen below this support level now. As such, I don’t expect the downward trend to end until the larger number of investors in these price ranges have been replaced by those who are willing to pay substantially higher for the SMCI shares.

SMCI and Nvidia

Now onto fundamentals, and one cannot discuss SMCI’s fundamentals without bringing up Nvidia (NVDA). These two stocks really rise and fall in tandem with each other, as you can clearly see from the chart below. The underlying reason is that SMCI is a leading vendor for Nvidia-powered server “clusters” used to train and deploy artificial intelligence (“AI”) models. Servers used for generative AI now comprise over half of SMCI’s revenue. So, in this sense, SMCI’s fate is in NVDA’s hands.

And NVDA has delivered blowout earnings quarter after quarter recently, with its guidance surpassing expectations. As seen in the chart, NVDA has just reported a triple-digit increase in YOY revenue growth in the most recent quarter. These developments have led SMCI shares higher as investors assumed positive ripple effects.

But can such neck-breaking growth rates be sustained? I highly doubt it. NVDA stock is highly cyclical by itself, and my view is that its growth is either near or at a cyclical peak now. My assessment is not based on the high valuation you often see (although it’s a good sign). My method for analyzing cycles was detailed earlier, and here I will just quote the key results:

My method relies on revenue growth rather than P/E. As seen in the chart below, NVDA has demonstrated tractable cycles in the past and I expect the rhythm to repeat for good reasons. During bad times, most cyclical businesses suffer profit decline (or even losses) and vice versa. Even only over the course of 5~6 years since 2018, I can see the pattern repeating itself multiple times as marked by the red dotted and green dotted lines. During each good time, the business enjoys a super growth phase (we are talking about 50%+ quarterly revenue growth YOY as seen). However, the growth phase was then followed by a large price correction shortly afterward. Vice versa, when the times are bad, the topline contractions are then followed by a robust price rally quickly.

Besides the unsustainable growth rates, another sign of a cyclical peak in my mind involves the earnings reports from equipment providers and chip manufacturers in the sectors. These companies provide the underlying fabrication capabilities for the chip industry, and thus I view them as leading signals for the cycle. ASML Holding (ASML) just reported its earnings last week. And its total new orders for the first quarter missed expectations by a wide margin. ASML attributed the decline in new orders to a significant drop in demand for its most advanced EUV lithography machines. Similarly, Taiwan Semiconductor (TSM), the world’s largest chip foundry, also released mixed results last week.

I believe these results are signs that indicate the current expansion cycle for NVDA and thus SCMI is ending.

Other risks and final thoughts

In terms of upside risks, there are two main ones as I see.

First and foremost, there are some key differentiation factors in SMCI’s business model compared to other companies in the AI sector. Strictly speaking, SMCI isn’t purely an AI company in my view. It is a hardware manufacturer that supplies key components for high-performance computing needs and happens to catch a ride on the AI wave. As such, it could enjoy the status of a shovel provider in a gold rush if AI truly takes off. On the other hand, SMCI has a broader range of customers in various industries who need high-performance computing in the case that the AI hype does not work out as expected.

Secondly, SMCI recently joined the S&P 500 Index thanks to its remarkable growth in sales and market capitalization. Inclusion in the S&P 500 can benefit its stock price in many ways, especially in our age where indexing and passive investing are mainstream. Many large investment funds track the S&P 500. This means they are now obligated to buy shares of SMCI, thus helping to drive up the demand and also the stock price. For active investors, inclusion in the index also helps with increased visibility and enhanced credibility, both of which can help with stock prices as well.

To close, I want to emphasize that the argument in this article is more oriented toward the near term. In the longer term, I share the optimism for the nonlinear growth potential in the AI space and have no doubt that SMCI would be a key player in this space. It is just that in the near term, I don’t think the sell-off is over yet judging both by technical and fundamental signs that I am seeing.