The S&P 500 index has jumped close to 22% since Oct. 13, 2022, which tells us why there is chatter on Wall Street that we are already in the middle of a bull market.
The S&P 500 was down 25% from the beginning of 2022 before hitting its most recent low on Oct. 12 last year. As a 20% jump in stock prices following an identical decline marks the arrival of a bull market, it is easy to see why investors believe that stocks are now firmly in bull territory. DataTrek Research estimates that the bull market, which began in June this year, is here to stay. Another analyst predicts that the S&P 500 could hit the 5,000 mark by the end of 2023, which would be an 11% jump from the current levels.
That's why now would be a good time for investors to load up on growth stocks such as Super Micro Computer (SMCI 0.41%), a company that stands to gain big time from the proliferation of artificial intelligence (AI). This magnificent AI stock has set the market on fire this year with eye-popping gains. However, it has pulled back significantly of late and is trading at a really attractive valuation. Let's look at the reasons why buying Super Micro Computer on the dip could turn out to be a smart move.
Super Micro Computer is growing at a terrific pace
Super Micro Computer sells high-performance server and storage solutions that are deployed in a broad range of verticals ranging from data centers to cloud computing to AI to 5G networks. Not surprisingly, the company is witnessing outstanding demand for its offerings thanks to the fast-growing nature of the end markets it serves, as evident from the terrific growth it delivered last fiscal year.
Super Micro released its fiscal 2023 fourth-quarter results (for the three months ended June 30, 2023) on Aug. 8. The company's quarterly revenue jumped 33% year over year to $2.18 billion. Non-GAAP earnings increased to $3.51 per share from $2.62 per share in the same period a year ago. The numbers easily exceeded consensus estimates of $2.96 per share in earnings on $2.08 billion in revenue.
However, light guidance meant investors were quick to press the panic button, and the stock fell more than 21% after its earnings report. Even then, Super Micro investors are sitting on eye-popping gains of roughly 200% in 2023, and those who have missed the stock's red-hot run may want to act quickly as it still trades at an attractive valuation.
Super Micro has a price-to-sales ratio of just 2. Its trailing-earnings multiple stands at 22, while a forward-earnings multiple of 7 points toward outstanding bottom-line growth. Buying Super Micro at this valuation looks like a no-brainer given the impressive growth it is expected to deliver. The company finished fiscal 2023 with sales of $7.1 billion, a big jump of 37% over the year-ago period. Its earnings per share more than doubled to $11.81 per share last fiscal year.
Management has guided for $2.05 billion in revenue in the current quarter along with adjusted earnings of $3.12 per share at the midpoint. The top-line guidance points toward an 11% year-over-year improvement, while earnings are on track to drop from the $3.42 per-share reading in the year-ago period. Super Micro blames this mixed performance on a shortage of components, but it is confident of ending fiscal 2024 with impressive top-line growth as it ended its latest fiscal year with a record backlog of orders, thanks to AI.
More specifically, Super Micro expects to end fiscal 2024 with $10 billion in revenue at the midpoint of its guidance range. That would be a 40% increase over fiscal 2023, pointing toward an acceleration in the company's growth. Super Micro Computer management pointed out on the company's August conference call that the company has "room to deliver more depending on availability of supply." It won't be surprising to see that happen given how fast the need for AI servers is growing.
AI is going to be a massive catalyst for Super Micro
Super Micro CEO Charles Liang said on the company's conference call last month that "our strong growth has been driven by the demand for our leading AI platforms in plug-and-play rack-scale."
A server rack is an enclosed rack in a data center that houses critical information technology (IT) infrastructure equipment. It provides security against theft and physical damage, regulates airflow, and allows data center operators to arrange their servers in the best possible manner to get the maximum performance out of their equipment.
As it turns out, Nvidia is one of Super Micro's key customers as the former is deploying its data center chips using the latter's rack-scale solutions. This explains why Super Micro is reportedly getting more than half of its revenue from selling AI-focused solutions. The good part is that the company's AI-driven growth is just getting started.
That's because the demand for AI servers is expected to grow at an astonishing annual rate of 50% through 2027. Nvidia is the dominant player in this market with an estimated market share of 60% to 70%, which bodes well for Super Micro given its tight relationship with the semiconductor giant. More importantly, Nvidia's foundry partner is busy ramping up the supply of advanced chipmaking equipment used for manufacturing AI chips, so it won't be surprising to see Super Micro's business improve as well.
The massive secular-growth opportunity in AI servers explains why Super Micro Computer management expects "the $20 billion annual revenue target to be just a couple of years away." Assuming the company hits that mark after two years and maintains its current sales multiple of 2, its market cap could jump to $40 billion.
That would be triple Super Micro's current market cap of $13 billion. But don't be surprised to see the stock jumping higher as the market tends to reward fast-growing AI stocks with a higher valuation. Nvidia, for instance, sports a sales multiple of 35, while its trailing-earnings multiple stands at an expensive 110.
Super Micro, on the other hand, is incredibly cheap when compared to Nvidia, and it is capable of soaring big time as we saw above, which is why investors may want to buy this AI stock before it becomes expensive.
