Super Micro Computer (SMCI 15.81%), more commonly known as Supermicro, didn't impress the bulls when it went public on March 29, 2007. It priced its IPO at $8, well below its forecast range of $9.50-$11.50, and it closed at $8.76 on its first trading day. At the time, Supermicro seemed like just another producer of high-performance servers.
That market was already dominated by companies like Hewlett-Packard Enterprise, which split from HP in 2015, and Dell Technologies. The California-based company was also fined in late 2006 for violating U.S. trade sanctions by indirectly exporting its motherboards to Iran in 2001 and 2002.
But if you had ignored those bearish takes and invested $1,000 in Supermicro's IPO, your investment would be worth about $35,600 today. The same investment in an S&P 500 index fund would only have grown to about $4,200 after including reinvested dividends. Let's see why Supermicro's stock skyrocketed and outperformed the market.
Image source: Getty Images.
A brief history of Supermicro
Supermicro was founded 30 years ago with the aim of building high-performance and high-efficiency servers. It also develops the software to manage those servers. It now its sells its servers to over 1,000 customers in more than 100 countries.
Between fiscal 2007 and fiscal 2020 (which ended in June 2020), Supermicro's annual revenue grew at a compound annual growth rate (CAGR) of 17% as its net income rose at a CAGR of 16%. That steady growth rate was driven by the expansion of the enterprise data center, cloud computing, edge computing, 5G, and artificial intelligence (AI) markets, which all drove more companies to ramp up their purchases of high-performance servers.
Supermicro is headquartered in San Jose, California, but it also operates facilities in the Netherlands and Taiwan. It previously outsourced some of its production to Chinese manufacturers, but it severed those ties in 2019 amid allegations that some of its manufacturing partners had installed spy chips in its U.S.-bound motherboards.
The AI market lights a fire under its business
Up until 2020, many investors likely considered Supermicro to be a stable but unexciting play on the secular expansion of the data center market. But over the past two years, its revenue and earnings growth exploded.
|
Metric |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|
|
Revenue Growth |
7% |
46% |
37% |
|
Adjusted Net Income Growth |
(9%) |
129% |
116% |
Data source: Supermicro.
That abrupt growth spurt was driven by the AI boom, which erupted as the rise of generative AI platforms like OpenAI's ChatGPT prompted more companies to upgrade their data centers with high-performance servers. It also partnered with Nvidia , which produces high-end GPUs for processing those AI tasks, to produce pre-built AI servers.
Supermicro expects its revenue to rise another 33%-47% in fiscal 2024, while analysts expect its adjusted earnings per share (EPS) to grow 42%. In its latest quarterly report, CEO Charles Liang said the company was still seeing "unprecedented demand for AI and other advanced applications requiring optimized rack-scale solutions."
Northland Capital Markets also recently estimated that Supermicro more than doubled its share of the AI server market sequentially from 7% in its fiscal third quarter to 17% in its fiscal fourth quarter as it pulled customers away from HPE and Dell. Those market share gains could make Supermicro a promising long-term play on the booming AI market.
The market could revalue Supermicro soon
At $285, Supermicro trades at 17 times forward earnings. That makes it a bit pricier than HPE or Dell -- which trade at 20 and 10 times forward earnings, respectively -- but it's growing a lot faster than both of those larger competitors.
If we look at Supermicro as an AI stock, it seems pretty cheap. Its partner Nvidia, which is often considered the bellwether of the sector, trades at 29 times forward earnings. OpenAI's biggest backer Microsoft, which has integrated ChatGPT into its own search engine and cloud services, has an even higher forward multiple of 30.
Based on these facts, I believe Supermicro's stock could climb even higher once the market revalues it as an AI stock instead of a slower-growing server company. It might not replicate its massive multibagger gains of the past 16 years anytime soon, but it could have more room to run than Nvidia, Microsoft, or the other darlings of the AI market.
