Shares of server and storage solution specialist Super Micro Computer(NASDAQ: SMCI) slumped Friday, shedding as much as 4.8%. As of 12:17 p.m. ET, the stock was still down 1.5%.
The catalyst that pushed the stock lower was a sizable secondary stock offering.
Millions of new shares
Super Micro Computer, commonly called Supermicro, announced a secondary stock offering this week that gave investors pause. In a regulatory filing with the Securities and Exchange Commission (SEC) and subsequent press release, the company said it is selling 2,100,700 shares of common stock.
Of that total, 2 million shares were being offered by the company, and 100,700 shares were being offered by "certain selling stockholders," which means the company won't receive those funds. Furthermore, Supermicro was granting underwriters a 30-day option to purchase an additional 315,105 shares at the public offering price of $262 per share.
The company expects to raise a total of $524 million before deducting underwriting discounts, commissions, and other expenses. If the underwriting banks pick up the option to buy the additional shares, Supermicro would pocket more than $606 million, less the aforementioned costs.
Is the stock still a buy?
There were a couple of reasons investors bid down Supermicro stock. First, the issue price of $262 was 4% below Thursday's closing price of over $273.
Perhaps more importantly, existing shareholders will own a smaller piece of the company. In late October, when Supermicro issued the results for its fiscal 2024 first quarter (ended Sep. 30), it said there were 53,313,542 shares of stock outstanding. Issuing more than 2 million additional shares will dilute existing shareholders to the tune of about 4.3%, if the underwriters exercise their option.
It's actually a smart move by Supermicro's management to raise cash now. The stock has ridden the rapid adoption of artificial intelligence (AI), up 233% so far this year as of the market close on Thursday. This secondary stock offering will nearly double the cash on the company's balance sheet, giving it a much greater degree of financial flexibility.
Supermicro's servers and other digital storage components and solutions will continue to see strong demand as more businesses scramble to adopt AI. Furthermore, Supermicro is a compelling opportunity at just 2 times sales. Therefore, the stock remains a buy.
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