Nvidia has turned out to be a hugely popular bet on the rapidly growing adoption of artificial intelligence (AI), and that's not surprising as this technology has created immense demand for the company's graphics cards that play a central role in training AI models. Last quarter, revenue doubled year over year, and even stronger growth is expected in the current one. It's no wonder the shares have soared 198% so far this year.
However, there is another AI hardware play that has delivered even stronger gains than Nvidia this year, is way cheaper, and is expected to soar big time in the long run: Super Micro Computer (SMCI +0.45%). Let's look at the reasons why you should consider buying this AI play even though it has soared close to 230% in 2023.
NASDAQ: SMCI
Key Data Points
Growth is set to pick up impressively
Super Micro sells high-performance server and storage solutions that power multiple applications such as data centers, 5G mobile networks, cloud computing, and AI servers. The company has differentiated itself from other server manufacturers by focusing on building modular designs that allow it to make servers more energy efficient.
This makes Super Micro's server solutions ideal for power-hungry applications such as AI. That's not surprising as the GPUs that power AI applications reportedly require 10 to 15 times more energy than traditional data centers that are powered by central processing units (CPUs). This explains why there has been a spike in demand for Super Micro's offerings, leading to a sharp jump in its growth of late.
SMCI Revenue (Quarterly) data by YCharts.
The company's revenue in fiscal 2023 (which ended on June 30) shot up 36% year over year to $7.1 billion. Super Micro delivered non-GAAP earnings of $11.81 per share for the full fiscal year, which was more than double fiscal 2022's earnings of $5.65 per share. Super Micro's fiscal 2024 guidance suggests that it is anticipating another outstanding year.
The company has guided for $10 billion in revenue in the current fiscal year at the midpoint. That would translate into a 41% increase over the company's fiscal 2023 revenue. However, Super Micro's management remarked on the latest earnings conference call that it has "room to deliver more depending on availability of supply," especially considering that it ended the previous fiscal year with a "record high backlog."
Super Micro didn't point out exactly how much backlog it is sitting on, but it is easy to see why the company said it is at record levels. After all, demand for AI servers has taken off remarkably this year, creating the need for more energy-efficient server solutions. Market research company TrendForce forecasts a 40% jump in shipments of AI servers in 2023.
Even better, AI server shipments are expected to increase strongly over the next three years, with TrendForce estimating an annual growth rate of 22% through 2026. Meanwhile, Foxconn Chairman Liu Yangwei forecasts that the AI server market could generate $150 billion in annual revenue in 2027 as compared to this year's estimated revenue of $30 billion.
So, Super Micro Computer's addressable market should continue to expand at a nice pace in the long run and ideally translate into healthy growth for the company.
Strong upside may be in store for the stock
Super Micro remains confident of attaining its target of $20 billion in annual revenue in a couple of years. Analysts, however, are painting a more conservative picture.
SMCI Revenue Estimates for Current Fiscal Year data by YCharts.
As the chart above shows, Super Micro's top line could jump 16% in fiscal 2025 followed by a 19% jump in fiscal 2026. Let's assume revenue jumps to $13.7 billion in fiscal 2026 -- in line with consensus estimates as the chart above indicates. Multiplying that with Super Micro's price-to-sales ratio of 2.1 points toward a market capitalization of almost $29 billion after three years, which is double the company's current market capitalization.
However, we have already seen that the company is anticipating a bigger increase and believes that it could double its revenue in a couple of years from fiscal 2024 levels. It is also worth noting that Super Micro's current infrastructure can help it generate up to $15 billion in revenue, and the company believes that its "new Malaysia facility will further increase our total revenue potential by serving scale builds on a reduced cost structure in the coming CY24."
So, the possibility of Super Micro outpacing analysts' expectations should not be ruled out. Also, the stock is trading at a very cheap valuation right now as its sales multiple indicates. The S&P 500 index, for comparison, has an average sales multiple of 2.4. Also, AI stocks carry a premium valuation. Nvidia, for instance, has a sales multiple of 33. Super Micro, therefore, is undervalued right now given the outstanding growth that it is delivering.
All this indicates that Super Micro could deliver stronger gains and perhaps more than double over the next three years. That's why investors looking for a fast-growing AI stock that's trading at a cheap valuation should consider buying Super Micro.
