How sustainable are SMCI's recent expense growth rates?

Super Micro Computer (SMCI) has demonstrated significant revenue growth, with a year-over-year increase of 54.93% in total revenue reaching $5.68 billion by the end of Q2 2025. However, the company's expense growth rate raises concerns about its sustainability. 1. **Expense Growth Rate**: The specific year-over-year growth rate for total expenses is not provided, but the significant revenue growth and the decline in gross margins suggest that expenses are increasing at a substantial rate. 2. **Gross Margin Pressure**: Super Micro has experienced a notable decline in gross margins, from 15% to 11%, which is a red flag for sustainability as it indicates that the company's profit margins are being squeezed. 3. **Free Cash Flow**: The company's free cash flow has been negative in the last three quarters, which is a critical indicator of financial strain and suggests that the company may be struggling to cover its expenses. 4. **Competitive Position**: Super Micro faces intense competition in the AI server market, which could lead to further margin pressure as competitors respond to its success. 5. **Strategic Investments**: The company's expansion plans, such as the upcoming Malaysia facility and the introduction of Datacenter Building Block Solutions, are likely to require significant investment, which could strain financial resources. In conclusion, while SMCI has achieved impressive revenue growth, the accompanying increase in expenses and the resulting pressure on gross margins raise questions about the sustainability of this growth. The company's ability to manage costs, maintain gross margins, and generate positive free cash flow will be crucial in determining the long-term viability of its growth strategy.