Back in early 2024, the AI boom was in full swing…
And no stock was hotter than Super Micro Computer
It was up 1,000% in 18 months.
Every AI newsletter was screaming "BUY SMCI!"
Every momentum trader was piling in.
The story was perfect.
AI servers were exploding in demand... SMCI was the pick-and-shovel play... revenue was growing 200% year-over-year.
What could go wrong?
As it turn out... everything.
The stock is now down 75% from its peak after multiple accounting scandals... delayed filings... and a resignation from their auditor to top it all off.
But this wasn't exactly a surprise... because the warning signs were there all along.
SMCI's revenue growth was impressive, but their profit margins were razor-thin. They were essentially a low-margin assembly business in a commodity industry.
Their accounting practices were questionable AND they'd been investigated by the SEC before for revenue recognition issues.
Their customer concentration was dangerous with a few big clients representing most of their revenue.
But momentum investors didn't care about any of that.
They saw a stock going up and assumed it would keep going up.
They confused price momentum with business quality.
They bought because the chart looked good, not because the company was good.
And this is the fundamental problem with momentum investing… it works until it doesn't.
And when it stops working… boy do you feel it… because momentum stocks don't decline gradually... they collapse.
So when the price action reverses, there's no fundamental floor to catch the falling stock.
SMCI at $120 per share wasn't worth any more than SMCI at $30 per share from a business perspective. The only thing that changed was investor sentiment.
This is why I focus on business fundamentals rather than price charts.
Revenue growth… profit margins… competitive advantages… balance sheet strength
Real tangible areas…
These factors determine long-term stock performance... not whether a stock has been going up recently.
When you buy based on fundamentals, you have a margin of safety. You know roughly what the business is worth, so you can hold through temporary price volatility.
When you buy based on momentum, you have no idea what you own. You're just hoping someone else will pay more than you did.
That's not investing… that’s rank speculation.
SMCI investors are learning this lesson the hard way as the stock goes from hero to zero in a matter of months.
But the real tragedy is that many of them will make the same mistake again with the next hot momentum stock.
Because momentum is addictive. The quick gains feel better than the slow, steady returns from quality companies.
Until the momentum stops.
To avoid this and start profiting from quality businesses... grab The 8 Step Beginner's Guide to Value Investing here
Oliver