Server manufacturer Super Micro Computer (SMCI 3.50%) was added to the S&P 500 index earlier this year. While the company has been operating for decades, soaring demand for servers capable of running artificial intelligence workloads has propelled Super Micro's revenues and profits to new heights.
Analysts at Loop Capital see the inclusion in the S&P 500 index as a reason to get behind Super Micro's pricey valuation. Loop Capital maintained its "buy" rating on the stock on Tuesday while boosting its price target from $600 to $1,500. Based on this new price target, Super Micro stock has a 70% upside.
On its way to $40 billion in revenue
Loop Capital expects Super Micro to exit fiscal 2026 with a $40 billion annual revenue run rate. The company generated $3.66 billion in revenue during its most recent quarter, which puts its annual revenue run rate just shy of $15 billion today.
Loop Capital also believes that Super Micro can trade for somewhere between 20 and 30 times earnings going forward, justifying that view by pointing to the stock's inclusion in the S&P 500. The consensus analyst estimate calls for Super Micro to produce adjusted earnings per share of $22.10 in the current fiscal year.
Is Super Micro stock a buy?
Here's the big question: How sustainable are Super Micro's profits? The company operates in a low-margin industry: Gross margin hovers in the mid-teens, and it's been declining in recent quarters.
As the market for AI servers explodes, competition is almost guaranteed to intensify from both direct competitors and cloud companies designing their own systems. Super Micro isn't going to be doubling its revenue annually forever.
Super Micro is successfully riding the AI wave, but it's important to remember that what the AI server market will look like five years out is highly uncertain. Investors should keep that in mind before buying the stock.
