Super Micro Computer sharply raises revenue outlook. Why is Bank of America still worried about margins?
Super Micro Computer’s first-quarter revenue outlook for fiscal 2027 far exceeds its original guidance. Bank of America raised its full-year revenue forecast to 79.6 billion dollars and its price target to 38 dollars. However, a sequential decline in gross margin and continued cash tied up in working capital have led it to maintain its Underperform rating.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
Bank of America raised its revenue and earnings forecasts for Super Micro Computer, but believes competition, customer mix and working-capital pressures will continue to constrain the profitability and valuation of its growth.
How far above the original guidance is revenue, and what will sustain growth?
Super Micro Computer forecast first-quarter fiscal 2027 revenue of 18.5 billion–19.5 billion dollars, compared with its original guidance of 14.5 billion–15.5 billion dollars. At the midpoint, the outlook was raised by approximately 27%. The change primarily reflects strong demand for AI servers and racks.
Bank of America believes some of the excess revenue may come from SpaceX, which plans to add 2.5–3.0 gigawatts of nameplate computing capacity by the end of 2026. Based on its continued strong capital spending, Bank of America raised its revenue forecast for each of Super Micro Computer’s remaining three fiscal 2027 quarters to approximately 20 billion dollars, and expects full-year revenue of 79.6 billion dollars, up approximately 104% year over year.
Gross margin is above guidance, so why is it still a major concern?
The company expects first-quarter gross margin of 12.0%–12.5%, above its original guidance of 10.4%–10.8%, because of a more favorable customer and product mix. But compared with 17.6% in the previous quarter, the midpoint of the new outlook still represents a decline of 5.35 percentage points; the margin is above guidance and weaker sequentially at the same time.
Bank of America worries that once the favorable mix normalizes, price competition in AI servers and racks, rising component costs and the typically lower margins on large deals will jointly exert pressure. In its model, gross margins for fiscal 2027 and 2028 are 10.7% and 10.2%, respectively. Revenue is expected to rise another 11.9% in fiscal 2028, while non-GAAP earnings per share edge down from 5.31 dollars to 5.29 dollars.
What can modular data center solutions improve?
At OCP 2026, Super Micro Computer showcased DCBBS, a data center building block solution covering modular products at the system, rack and entire data center levels.
Bank of America believes DCBBS carries higher margins and, as its contribution to profit grows, can provide another path to gross-margin improvement beyond customer mix. The key is a larger profit contribution from these solutions, rather than just an increase in server sales volume.
Why has earnings growth not produced positive free cash flow?
In fiscal 2026, the company’s free cash flow was negative 6.972 billion dollars, including 9.648 billion dollars consumed by changes in working capital. Bank of America expects working capital to consume another 6.74 billion dollars in fiscal 2027; even with earnings growth, free cash flow is expected to remain negative 3.163 billion dollars.
Bank of America therefore views working capital as a continuing drag and expects free cash flow to remain negative 1.635 billion dollars in fiscal 2028. Expansion requires funding, and the report also identifies possible additional financing for working capital as a valuation constraint.
Why did the rating remain unchanged despite a higher price target?
Bank of America raised its fiscal 2027 non-GAAP earnings-per-share forecast from 3.98 dollars to 5.31 dollars and its price target from 33 dollars to 38 dollars. It also changed the valuation basis from 8 times calendar 2027 earnings per share to 7 times calendar 2028 earnings per share of 5.50 dollars: the higher price target came alongside a lower valuation multiple.
The reasons for maintaining the Underperform rating include margin pressure, negative free cash flow and material weaknesses in internal control over financial reporting that remained as of the fiscal 2026 annual report. New CFO Mark Long has taken office, and Bank of America expects him to address the internal-control issues gradually. These constraints also explain why the bank continues to assign a valuation below that of peers.
