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The week showed that AI enthusiasm remains powerful but not as strong as earlier in the year. SpaceX surged 19.2% in its public-market debut, reinforcing demand for AI-adjacent growth stories, while other AI and semiconductor names were mixed after sharp swings. Reuters also reported that global technology funds drew inflows for a tenth straight week, even as U.S. equity funds saw outflows, suggesting investors are still buying the AI theme selectively rather than abandoning it.

Inflation rose 4.2% year over year. This is well above the Fed’s 2% target. This didn’t shock the market because the high inflation report was expected.

SpaceX’s debut helped reset market tone after a choppy stretch for growth stocks. AP reported that SpaceX rose 19.2% in its first day of trading, while Reuters described the IPO as historic and said its success helped lift Wall Street alongside Middle East peace hopes. The investor lesson is two-sided: demand for premier growth and AI-linked assets remains strong, but the broader AI trade is becoming more selective as valuation, earnings quality, and exposure to real cash-flow growth matter more.

I always tell people to never touch IPO’s for many reasons. The first - you don’t know what you’re investing in. When companies go public, we don’t have years of financials to assess how management is running the business. In the case of SpaceX we have three years of financials at the time of IPO, but that doesn’t give you the ability to give a quality analysis of the business.

The second - IPO valuations are pushed up by the investment banks who receive incentives for the stock reaching different levels after it goes public. Often, the price rises due to hype and trading activity, then falls after people have had their fun. Look at this chart of notable IPOs and their 6 month and 1-year performance:

This is a sign that avoiding IPOs and waiting until we have more data reduces lots of risk from our portfolio. Wait at least 5 years so you can understand who the business is and where they stand regarding their competition.

The setup.
Supermicro builds the AI servers many wants right now and the market loves the story. But strip away the hype and you find a 33-year-old company with thin margins, unreliable cash flow, and a troubled record with regulators. Price is what you pay; quality is what you get. On quality, this one falls short.

What the business does.
It assembles complete server systems. The racks that house Nvidia's chips in data centers. Server and Storage Systems is 97% of revenue. It's a real AI player, but a fast-growing challenger, not the leader of its field.

The issue with their growth.
Revenue rocketed from $2.2B (FY2016) to $21.9B (FY2025), compounding ~49% a year, with TTM sales of $33.7B. The growth is expected to be about 44%. This sounds great at the surface but the margins tell a different story.

Yes, top-line revenue is growing, but margins are shrinking. This lets me know the quality of the revenue growth isn’t there. As $SMCI ( ▲ 0.85% ) needs to produce more to serve the AI revolution, their costs are going up along with their revenues. This is the impact of what it takes to make the servers for high performance semiconductors. The five-year average gross margin is 14.6% vs. a 38.4% industry average; net margin 6.0% vs. 17.8%. The company is getting bigger and less efficient. This is the opposite of quality.

The FCF story.
Free cash flow is the metric I trust most, and Supermicro's is inconsistent — four negative years out of the last ten. FY2025 was a good year (+$1.53B), but the latest quarter burned $6.6B of cash in operations, and nine-month FY2026 operating cash flow was negative $7.6B as inventory and receivables ballooned.

Balance sheet rating: Deteriorating.
Debt-to-FCF was a solid ~3.1× at FY2025 year-end, but debt has since jumped to $8.8B (~5.7× — concern), flipping the company from net cash to ~$7.5B net debt in nine months. Cash fell from $5.2B to $1.3B.

Dilution note.
Share count has risen almost every year since the 2007 IPO (~24% over nine years). Now management plans to raise ~$7B more through equity and convertibles. Fully diluted shares are already ~695M vs. 594M basic. Given the track record, can't trust it. Savvy investors are selling on the news.

Governance shadow.
Delisted by Nasdaq in 2018 over improper revenue recognition; relisted in 2020 after an SEC settlement. A 2024 short-seller report and the auditor's resignation triggered another delisting threat, narrowly avoided in early 2025. The FY2025 10-K still reports unremediated material weaknesses in financial controls, and the board is now reviewing certain export-control transactions.

See what I think about the stock price and true intrinsic value of $SMCI ( ▲ 0.85% ) .