Super Micro Computer (NASDAQ:SCMI) has been one of the best-performing stocks worldwide over the past 12 months. The share price has surged by almost 1,000% as demand for its AI-enabling services has soared. However, it’s evident that the margin of safety is no longer as clear as it once was, with Super Micro trading at very high near-term multiples. Nonetheless, I’m confident investors can still find value in this cutting-edge technology stock. Therefore, I’m bullish on SMCI.
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It’s important to start by recognizing Super Micro’s role in the AI revolution. A provider of Total IT Solutions, the San Jose-headquartered company offers a portfolio of servers, storage systems, switches, and software that can accelerate AI. These server systems are essentially supercharged computers that can handle thousands of tasks at once and store huge amounts of data. As such, Super Micro’s server offerings are used to run everything from websites, cloud servers, and now generative AI.
To elaborate further, these supercharged computers power a vast array of things we’ve started to take for granted. And without high-performance servers, large language models such as ChatGPT wouldn’t be possible. As a server provider, its largest customers are cloud service providers (CSPs), including Amazon (NASDAQ:AMZN), Alibaba (NYSE:BABA), Google (NASDAQ:GOOGL)(NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT).
Complementing this is a host of products and services, such as its liquid-cooled AI development platform — an out-of-the-box piece of hardware that allows small- and medium-sized businesses to utilize AI. Some 94% of Super Micro’s revenue comes from its Server and Storage Systems business line. The tech firm, which now has a market cap in excess of $60 billion, also offers a host of services, including networking equipment to facilitate communication within IT infrastructures.
First-to-Market Advantage
Super Micro’s competitive advantage lies in its capacity to bring new products to market at speed. This is particularly important in the fast-moving world of AI, where new developments, notably in the world of generative AI, are constantly requiring greater workload capacity. Central to this is its Building Blocks architecture that allows customers to create custom rack scale solutions based on their exact needs.
This engineering-led business is also benefiting from its liquid cooling solutions, where it’s enjoying a first-mover advantage. Liquid has 1,8000x more cooling capacity than air and is 25x better at transferring heat. As such, Super Micro’s proprietary liquid cooling technology allows chipsets to operate to optimal capacity – because temperature is a key determinant of performance – and with a fraction of the energy a traditional air-cooling system would use.
According to Super Micro, switching from air conditioning to its liquid cooling technology can reduce operating expenses by 40%.
Keeping Up with Growth
I’m ashamed to say I had reduced my position in Super Micro before the recent bull run – although I got back in just in time to reap some of the rewards. One of the challenges with the AI revolution is that many analysts and investors have struggled to fathom the sheer size of the boom. Super Micro has beaten expectations in each of the last three quarters and has guided positively for the current quarter.
Forecasting where earnings will come in has arguably never been more challenging. Analysts are guiding for a 245.25% year-over-year increase in earnings per share (EPS). That’s already phenomenal growth.
So, does Super Micro still offer value to investors? Well, trading at 40x forward earnings based on Fiscal 2024 estimates (Fiscal 2024 ends in June for SMCI), it’s starting to look rather expensive. However, the all-important price-to-earnings-to-growth (PEG) ratio points to a potential undervaluation.
Super Micro’s premium pricing also reflects some very strong growth assumptions, notably a CAGR of 48% over three to five years. Assuming EPS growth of 48% per annum over the medium term, the stock’s PEG ratio currently sits at just over 0.8x if using its forward P/E as a starting base. In the current market, that’s a very attractive metric.
Is SMCI Stock a Buy, According to Analysts?
Its attractive valuation relative to its growth is likely one reason why Super Micro remains a Moderate Buy, according to Wall Street analysts. The stock currently has five Buy ratings, three Holds, and one Sell. The average SMCI stock price target is $824.11 inferring 24.45% downside from the current price. However, it’s worth recognizing that the consensus is heavily influenced by the lowest and oldest share price target of $160. If the stock were changing hands for $160, it’d be trading at just 7.2x forward earnings.
The Takeaway
Investors may be cautious about a stock that has surged over 10x in just 18 months. It’s also worthwhile noting that Super Micro has lower gross margins than peers like Dell (NYSE:DELL) and HP (NYSE:HPE). Nonetheless, Super Micro still looks like an attractive investment on a long-term basis. Several brokerages and analysts have highlighted that the AI revolution is only just beginning, and with its focus on being first to market, Super Micro looks set to benefit from a multi-year super cycle.
Likewise, investors may be buoyed further by the company’s engineering-led approach. The majority of employees are engineers by trade, and CEO Charles Liang has multiple patents to his name.
