Super Micro Computer (SMCI) stock has witnessed an extravagant rally this year. Shares are up 176% year-to-date, far outpacing the best of stocks and the rally in the broader S&P 500 Index (SPX). This brings us to the important question of whether the excitement around SMCI stock is overblown or justified. The rally in the stock has been mainly triggered by AI-led tailwinds. However, ahead of the company’s Fiscal Q4 earnings in August, Wall Street is divided on the stock due to its elevated valuation levels. The upcoming results will make it clear if the stock deserves a premium valuation or not.
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Currently, Wall Street expects SMCI’s Q4 FY24 earnings per share (EPS) to surge about 131% year-over-year to $8.10.
Let’s delve deeper to understand some important parameters impacting SMCI stock.
SMCI Trades at Premium Valuations
Super Micro Computer designs and manufactures application-based, high-performance server and storage solutions for data centers, cloud computing, artificial intelligence (AI), 5G, and edge computing.
AI is the super force driving the demand for SMCI’s offerings. However, shares are currently trading at premium valuations. SMCI’s trailing twelve-month P/S ratio (price-to-sales) of 3.65x is higher than the sector average of 3.04x and the stock’s own five-year average ratio of 1.14x. Similarly, SMCI’s P/E (price to earnings per share) multiple is also at premium levels.
Key Takeaways from TipRanks’ Bulls Say, Bears Say Tool
According to TipRanks’ Bulls Say, Bears Say tool, SMCI has equal and solid arguments on both sides. Bulls are optimistic about the company’s record demand backlog, the potential to grow market share in data centers, and new product launches that support the AI revolution. All of these point to a growing revenue stream in the long term.
On the other hand, Bears are watchful of SMCI’s declining gross margins that are impacting the shares.
Hedge Funds vs. Retail Investors
A look at TipRanks’ Hedge Fund Activity tool shows that currently, hedge funds are dumping SMCI stock. Super Micro Computer has a Very Negative Hedge Fund Confidence Signal. Several hedge funds decreased their SMCI holdings by 240,500 shares in the last quarter.
On the contrary, retail investors are on a buying spree. TipRanks’ Stock Investor tool displays a Very Positive Investor Sentiment, with the number of portfolios holding SMCI stock increasing by 4% in the last 30 days.
Analysts Remain Divided on SMCI Stock
Wall Street remains divided on SMCI’s stock trajectory. On TipRanks, SMCI stock has a Moderate Buy consensus rating with five Buys, five Holds, and one Sell rating. Analysts have assigned varying price targets on the shares, ranging from a Street High of $1,500 (90.8% upside) to a low of $325 (58.7% downside).
Meanwhile, the average Super Micro Computer price target of $978.50 implies a 24.5% upside potential from current levels, even after the impressive year-to-date rally in the stock.
Ending Thoughts
Super Micro Computer is riding the AI wave. The company’s expertise in liquid cooling technology for high-performance AI systems is expected to fuel continued demand momentum. Having said that, companies are becoming more self-reliant and developing in-house solutions for all things AI, while competition is also gaining steam.
Currently, SMCI’s sky-high valuation seems to be the biggest challenge. Although demand persists, SMCI’s share price has reached elevated levels, and only strong fundamentals and a major catalyst, like the upcoming Fiscal Q4 earnings, will be able to justify the current prices.
