Artificial intelligence (AI) is transforming the world in unprecedented ways. AI enhances our lives and creates new possibilities, from self-driving cars to smart assistants. But how can investors benefit from this technological revolution? One company that might be the answer is Super Micro Computer (SMCI -0.15%), also known as Supermicro, a leading provider of AI infrastructure solutions.
Although it has an impressive product line and strong growth potential, Supermicro's stock price has been under pressure lately. Yet, despite the recent bearishness toward the company, you should still consider putting Supermicro on your buy list. Here's why.
The company's growth outperforms its industry
Supermicro is a global technology leader specializing in delivering rack-scale IT solutions, which are information technology infrastructure solutions designed to be deployed and managed as a single unit rather than as individual servers or storage devices. This can help to improve efficiency and reduce costs.
Rack-scale IT solutions are becoming increasingly popular as data centers become more complex and demanding. By providing a single point of contact for all IT needs, rack-scale providers can help businesses simplify their IT infrastructure and improve their overall IT performance.
Organizations use Supermicro's rack-scale IT solutions for data centers, cloud computing, AI, metaverse, and 5G applications. Because of the growth of each of these areas, demand for its rack-scale solutions has rocketed over the last several years.
Image source: Supermicro.
As the chart above illustrates, Supermicro's competitive edge became evident in mid-2021 when it began outperforming its industry. You can attribute this exceptional performance to two key advantages.
The first is customization, which enables Supermicro to cater to its customers' unique requirements. It stands out by allowing customers to select their servers' processor, memory, storage, and networking components. This level of flexibility empowers customers to choose the ideal server for their specific needs. In contrast, some rivals offer only a limited range of customization options.
The second advantage is time to market, which is the time it takes to market a new product or service. A shorter time to market can be a competitive advantage because it allows a company to sell its new products or services before its competitors, giving the company a head start in the market and allowing it to capture more market share.
A big beneficiary of the AI boom
On Nov. 30, 2022, OpenAI, a partner of Microsoft, launched ChatGPT, which sparked the proliferation of many other AI applications in the market. Supermicro addressed the rising demand for AI technology by using its time-to-market advantage to be the first to provide its customers with advanced AI hardware products and solutions, which set it apart from its competitors and enabled the company to gain a stronger foothold in the market.
Investors quickly realized that hardware manufacturers capable of supplying energy-efficient servers for AI applications would benefit significantly from the AI revolution. Supermicro gained attention after releasing its third-quarter 2023 report that showed rapid revenue growth in its AI infrastructure business, driven by ChatGPT and other AI applications. Despite third-quarter total revenue growth not being noteworthy, management expected a solid finish to the overall fiscal year 2023 results fueled by AI growth.
Before the third-quarter report, the stock sold at a price-to-sales ratio of less than 1 and a price-to-earnings (P/E) multiple of around 10. Many investors rapidly bought shares, seeing a possible mismatch between its valuation and what AI could bring to the company's future revenue and earnings growth. By Aug. 7, the stok was up over 330% for the year to its all-time high of $357.
One fly in the ointment
Although Supermicro's future looks bright, its growth could be at risk due to recent supply constraints from companies like Nvidia, a major supplier of graphics processing units (GPUs) to Supermicro. The demand for GPUs has multiplied in recent years as many of the fastest-growing applications utilize GPUs, including artificial intelligence, cloud computing, and data analytics. Nvidia has struggled to keep up with demand.
Potential supply constraints from Nvidia and other component suppliers are a risk to Supermicro's growth. It could limit the company's ability to meet its customer's demands, leading to lost sales and revenue and hurting its financial performance. In addition, supply constraints could damage Supermicro's reputation with customers, making it more difficult for the company to win new business.
Surprisingly, the market reaction was poor when the company reported record revenue and earnings for the fourth quarter and full year of fiscal 2023 on Aug. 8. The stock fell more than 23% the next day as investors were disappointed by the lower-than-expected guidance for fiscal 2024 and concerns about supply chain challenges and competitive pressures choking off growth.
Although the company has taken several steps to mitigate the risk of supply chain disruption, like diversifying its supplier base, building deep relationships with suppliers, and expanding its manufacturing capacity worldwide, including a new facility in Malaysia, if a major supplier like Nvidia is unable to produce enough GPUs, Supermicro will be unable to satisfy the demand of its customers. It's a risk investors will have to live with for now.
An opportune time to buy
Supermicro is a well-positioned company with strong financial performance, a leading market position, and a focus on innovation and customer satisfaction. Its current P/E ratio is 21.3, which is reasonable given the earnings growth potential. For growth investors, this could be an opportune time to consider opening a position in this company.
