Stock splits not only make a company’s stock more affordable, but can also cue investors in to competitively advantaged businesses. That’s because stock split are only necessary after substantial and sustained price appreciation, which rarely happens to mediocre companies. But investors still need to do some research.
Last year, Super Micro Computer(NASDAQ: SMCI) and Arista Networks(NYSE: ANET) split their stocks to make shares accessible to more investors. Super Micro completed its 10-for-1 split on Oct. 1, and Arista completed its 4-for-1 split on Dec. 4. But Wall Street still anticipates gains in both stocks:
Super Micro has a median 12-month target price of $50 per share. That implies 38% upside from the current share price of $36.
Arista has a media 12-month target price of $125 per share. That implies 54% upside from the current share price of $81.
Super Micro manufactures storage systems and servers, including full server racks that provide turnkey data center infrastructure. The company uses common electronic “building blocks” across product lines to rapidly assemble a broad range of hardware featuring the latest chips from suppliers like Nvidia. CEO Charles Liang says Super Micro often beats peers to market by several months.
That first-to-market advantage, coupled with a broad portfolio, have made the company a major player in AI servers, though analysts disagree about its precise market share. Bloomberg puts Super Micro in second place behind Dell Technologies, but Counterpoint Research ranks the company as the leader. Importantly, AI server spending is forecast to increase 55% in 2025.
Super Micro reported disappointing financial results in the second quarter of fiscal 2025, which ended in December 2024. Revenue increased 55% to $5.7 billion, but gross margin declined 3 percentage points, and generally accepted accounting principles (GAAP) net income was flat at $0.51 per diluted share. That company also lowered its full-year guidance.
Super Micro recently struggled through a series of regulatory issues that started last August when short-seller Hindenburg Research accused the company of accounting manipulation. The allegations were particularly concerning because Super Micro paid a $17.5 million fine for similar accounting violations in 2020.
However, while a Justice Department probe is reportedly ongoing, Super Micro may have weathered the storm. The company recently filed long overdue annual and quarterly reports with no restatements, meaning its new auditor found no evidence of accounting manipulation. The company is now back in compliance with Nasdaq Stock Exchange listing requirements.
Even so, I think investors should watch Super Micro for another quarter before buying the stock. The lack of earnings growth in the December quarter makes me uneasy, especially at a time when businesses are spending heavily on AI. If Super Micro looks stronger in the next quarter, consider buying shares at that point.
Investors should pay particularly close attention to gross margin. If it continues to decline, Super Micro is likely losing pricing power due to increased competition.
Arista provides networking solutions for enterprise and cloud data centers, as well as campus environments. Its portfolio includes switching and routing platforms that, unlike hardware from some vendors, runs a single operating systems in every environment. That simplifies network maintenance. Arista also provides adjacent software for telemetry and security.
Arista has consistently taken share from Cisco Systems during the last decade and now leads the market in data center switches. Better yet, Arista has three times more market share than Cisco in data center switches, with capacity of 100 gigabits per seconds or greater. Those ultra-fast platforms are essential for complex data center tasks like training machine learning models and running AI applications.
Arista reported solid financial results in the fourth quarter. Revenue rose 25% to $1.9 billion and non-GAAP net income increase 25% to $0.65 per diluted share.
The only disappointing news was Meta Platforms accounted for 15% of sales, down from 21% last year. However, Microsoft accounted for 20% of sales, up from 18%. And Arista recently added Apple and Oracle as customers.
Wall Street estimates Arista’s earnings will increase 10% in 2025. That makes the current valuation of 37 times earnings look expensive, but I think analysts are overly pessimistic. Arista expects revenue to increase 24% in the first quarter, and margin guidance implies earnings will grow at a similar pace.
Additionally, the company beat the consensus estimate by an average of 14% in the last six quarters. The current valuation is sensible if that continues. Investors with a time horizon of at least three years should consider buying a small position in Arista today.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Arista Networks and Nvidia. The Motley Fool has positions in and recommends Apple, Arista Networks, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
