Although it's not a perfect indicator, when a company insider -- either a board member or a C-suite executive -- purchases a lot of stock on the open market, it can be an encouraging sign for a stock.
And it's not every day when you see a massive insider purchase of a stock that has already tripled over just a few months.
Yet that's exactly what happened on Friday with artificial-intelligence (AI) server specialist Super Micro Computer (SMCI 8.89%), which is certainly encouraging for shareholders following the stock's post-earnings pullback.
A director buys over $1 million on the post-earnings dip
On Friday, Super Micro released an SEC filing, disclosing that board member Shiu Leung "Fred" Chan bought 4,000 shares of stock at between $261 and $269 on Friday, costing him about $1.062 million and increasing his stake by about 11%.
It might seem crazy for someone to buy so much stock with Super Micro up 209% already on the year. However, Super Micro did just pull back some 100 points following its second-quarter earnings report.
Nonetheless, Super Micro did beat analyst expectations and gave guidance for about 40% revenue growth over the upcoming year ahead. While next quarter's numbers may have disappointed at just flat quarter-over-quarter growth, management was pretty clear this performance was entirely due to supply constraints of key components. Those are probably Nvidia GPUs, which are currently in high demand for new generative AI use cases.
While traders took profits, Super Micro doesn't look expensive
Clearly, Chan thinks this pullback is overdone. While the stock had already boomed this year on prospects for AI-fueled growth, it still doesn't look expensive if Super Micro is able to hit its just-released guidance for 2024.
Management sees about $10 billion in revenue for the fiscal year ending next June, up from a little over $7 billion posted in the recently completed year. Assuming Super Micro can slightly improve last year's 9% net profit margin to 10%, the company could make $1 billion in profit next year against just a $14 billion market cap today.
A 14 P/E ratio is not expensive, especially for the company posting this kind of growth.
Image source: Getty Images.
This isn't the first time Chan has purchased stock this year
It may be helpful to know something about Chan and his history with Super Micro. Chan became a director in late 2020, after Super Micro increased its number of board seats to nine.
Chan is currently the founder and president of a large real estate company, KCR Development, which has developed more than $1 billion worth of projects in California and Hawaii. But Chan also has an extensive background in technology. He founded and ran ESS Technology, a private semiconductor company that had been public from 1995 to 2008. He was its CEO before serving as chairman from 2015 to 2019. Chan has also been an officer of other tech companies, including a semiconductor design center and a computer-aided-engineering design company.
So Chan does have some expertise in the tech industry, so it should be encouraging that he knows what he's doing with these purchases of SMCI stock.
Moreover, this isn't the first time Chan has bought Super Micro shares on the open market. In fact, in addition to the restricted stock units he receives as part of his director position, Chan has been purchasing shares on the open market since last fall.
Last November, Chan bought just over 16,000 shares of Super Micro between $76 and $88 per share throughout the month, equal to about $1.3 million in total. Then in February, Chan bought another 3,000 shares at $85.48 for just over $256,000.
Things got even more interesting when Chan purchased another 4,000 shares of SMCI at just over $133 per share for $532,000, following the stock's spike that came after the company's first-quarter earnings report. The stock was up more than 30% and sat at an all-time high. That purchase raised some eyebrows at the time, but it proved prescient, as Super Micro stock soon went on to rise to over $350 per share before this recent report.
If Chan's buys are any indication, Super Micro's stock is likely to go higher once again. That's especially true as Chan bought more stock at $265, in dollar terms, than he did at $133 and $85 earlier this year.
How long can Super Micro keep growing?
Super Micro's financial results have impressed more than even bullish investors could have expected a few years ago. The company is on track to make more than $10 billion in revenue this coming year, stunning growth over the $3.4 billion the company made as recently as fiscal 2020. Yet it appears Super Micro's differentiated building-block designs, which are the most energy-efficient in the industry, has found favor with more and more customers looking to deploy energy-intensive AI servers at scale.
Moreover, CEO Charles Liang doesn't see that growth stopping anytime soon. On the recent conference call with analysts, Liang noted this year that he could see upside beyond guidance, should supply constraints on GPUs ease. He also restated a company goal of reaching $20 billion in revenue, a target he now sees the company hitting in "just a couple of years."
If Super Micro hits that target in that time frame, shares are still clearly undervalued today. And it appears Liang at least has the confidence of one board member in Fred Chan, who just made an even bigger bet on the company's continued AI strength.
