Results and Guidance Sharply Beat Expectations, but Margin Normalization and Competitive Pressure Support a Cautious Stance

Overview

This report reviews SMCI's F4Q26 results and updates earnings forecasts and valuation. Revenue was at the low end of guidance, but gross margin and EPS substantially exceeded expectations, driven by a higher mix of higher-margin businesses such as enterprise customers and CPU servers. The company also issued strong F1Q27 and FY27 revenue guidance and stated that its existing balance sheet and operating cash flow are sufficient to support the current growth plan. Goldman Sachs acknowledges order growth, customer diversification, and product expansion, but believes the quarter's high gross margin cannot be directly extrapolated and maintains a cautious view.

Core views

First, the F4Q26 profit beat was mainly driven by a temporary improvement in business mix rather than a stabilized upward trend in underlying margins; artificial intelligence revenue declined from more than 80% of revenue in F3Q26 to approximately 60%, increasing the higher-margin contribution from enterprise customers and CPU servers. Second, more than $60bn of new orders and FY27 revenue guidance indicate that demand for artificial intelligence infrastructure remains strong, but as artificial intelligence revenue is expected to rise back above 80% of revenue, F1Q27 gross margin is expected to fall back to 10.4%-10.8%. Third, the company is broadening its business mix through enterprise customers, CPU servers, storage, networking, and data center modular solutions, while raising minimum financial return requirements for new businesses. Fourth, although earnings forecasts were raised significantly, competition in the enterprise server business is intensifying, Goldman Sachs lowered its target valuation multiple to 7.5x and maintained its Sell rating.

Analysis framework

The report compares actual results item by item with Goldman Sachs forecasts, consensus expectations, and company guidance, and breaks down the gross margin upside into business mix, tariff, and inventory factors; it then updates F2027-F2029 revenue and EPS forecasts based on order structure and near-term and full-year guidance; finally, it uses an NTM+1 EPS multiple approach and references the historical valuation of traditional enterprise information technology hardware to determine the target price.

Methodology notes

• Relative Multi-Factor EvaluationGoldman Sachs Factor Profile

  Growth, financial returns, valuation multiples, and composite percentiles

  This framework uses forward sales, EBITDA, EPS, return on equity, return on invested capital, cash return on invested capital, and multiple valuation metrics to calculate standardized rankings and compare them with companies under coverage in the Americas and industry peers.

• Relative ValuationNTM+1 P/E Valuation

  Target price equals forward EPS multiplied by the target P/E multiple

  Goldman Sachs calculates a 12-month target price of $34 using 7.5x NTM+1 EPS, down from 9x previously; 7.5x is close to the historical valuation of traditional enterprise information technology hardware, and the report cites DELL's average trading level of approximately 7x in 2020-2023 as a reference.

• M&A Probability EvaluationGoldman Sachs M&A Rating Framework

  Measures the probability of a company becoming an acquisition target on a scale of 1 to 3

  SMCI's M&A rating is 3, corresponding to a relatively low probability of becoming an acquisition target, approximately 0%-15%; this rating is viewed as having no material impact on the target price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US.SMCI

  U.S.-listed stock directly covered by the report

  Strengths

  Artificial intelligence server demand is strong, with more than $60bn of orders received in F4Q26; FY27 revenue guidance is significantly above consensus expectations; customer count and product mix are becoming more diversified; management has begun emphasizing minimum financial return requirements.

  Weaknesses

  Revenue is still affected by customer data center power, cooling, and network readiness delays; gross margin in the artificial intelligence server business is lower and quarterly margins are volatile; rapid growth creates working capital and potential financing pressure.

  Comparison

  The 7.5x NTM+1 EPS target multiple is close to traditional enterprise information technology hardware valuations, with Goldman Sachs using DELL's average trading level of approximately 7x in 2020-2023 as a reference.

  Risks

  Margin improvement falling short of expectations, intensified competition in enterprise data center infrastructure, continued delays in customer projects, and the potential need for additional financing if revenue significantly exceeds $80bn.

Key data

• F4Q26 Revenue$11.12bnNear the low end of the company's prior $11.0-$12.5bn guidance range, 7% below Goldman Sachs' forecast and 5% below consensus expectations.
• F4Q26 Non-GAAP EPS$1.70Above the company's prior guidance of $0.65-$0.79 and also significantly above Goldman Sachs' $0.73 and consensus $0.71 forecasts.
• F4Q26 Gross Margin17.6%Significantly improved from 10.1% in F3Q26 and above the prior guidance of 8.2%-8.4%.
• F4Q26 Operating Margin14.3%Significantly improved from 7.3% in F3Q26, with non-GAAP operating profit of $1.595bn.
• F1Q27 Revenue Guidance$14.5-$15.5bnSignificantly above the $11.8bn consensus expectation cited in the report.
• F1Q27 Non-GAAP EPS Guidance$1.01-$1.10Above the $0.72 consensus expectation cited in the report.
• F1Q27 Gross Margin Guidance10.4%-10.8%A clear normalization from 17.6% in F4Q26, but still above the 8.4% consensus expectation cited in the report.
• FY27 Revenue Guidance$65-$72bnAbove the $53bn consensus expectation cited in the report; Goldman Sachs' current forecast is $67.88bn.
• F4Q26 Orders ReceivedMore than $60bnApproximately 70% related to pure artificial intelligence deployments and GPU servers, and approximately 30% related to CPU-based artificial intelligence and CPU demand.
• F2027 EPS Forecast$4.32The prior forecast was $3.12; F2028 and F2029 forecasts were raised to $4.58 and $5.11, respectively.
• 12-Month Target Price$34Previously $30, based on a 7.5x NTM+1 EPS valuation; the report price is $31.60.

Impact & implications

Strong orders and higher-than-expected revenue guidance increase visibility into revenue and earnings over the next several years, while customer diversification and enterprise product expansion may also improve long-term business quality. However, F4Q26 margin was clearly boosted by temporary mix factors, and gross margin is expected to fall back after the artificial intelligence business mix recovers. The target price increase mainly reflects higher earnings forecasts, while the lower valuation multiple reflects intensified competition in enterprise servers and insufficient margin sustainability; therefore, the report believes the limited upside to the target price is not enough to change its relatively cautious investment view.

Risks

• Power, cooling, networking, and data center readiness issues may continue to cause delays in customer projects and revenue recognition.
• F4Q26 gross margin was mainly driven by a favorable customer and product mix, and margins may decline significantly as artificial intelligence revenue returns to more than 80% of revenue.
• Competition in the enterprise data center infrastructure market is intense, with incumbent vendors having long-term customer relationships and more complete product and service portfolios.
• High growth requires substantial inventory and working capital, which may pressure cash flow and the balance sheet.
• Management believes the current $65-$72bn revenue outlook does not require additional capital, but if revenue significantly exceeds $80bn, additional financing may be needed and could cause equity dilution.
• Upside risks to the Sell rating include stronger-than-expected artificial intelligence server demand, market share gains, improved core operating margin, and faster-than-expected progress in customer diversification.

What to watch

• Whether F1Q27 revenue can reach the $14.5-$15.5bn guidance and whether customer project delays ease.
• Whether gross margin can stabilize at a sustainable double-digit level after falling from 17.6% to 10.4%-10.8%.
• After artificial intelligence revenue again exceeds 80% of revenue, the impact of changes in customer and product mix on profitability.
• The conversion pace of more than $60bn of orders, and the actual delivery mix of pure artificial intelligence, GPU server, and CPU-related demand.
• Penetration progress in enterprise customers, CPU servers, storage, networking, and data center modular solutions.
• Working capital, free cash flow, and inventory turnover, and whether the company needs additional financing.
• Whether minimum financial return thresholds for new businesses can improve core operating margin while maintaining growth.