Shares of server and storage solution specialist Super Micro Computer (SMCI -3.05%) slumped Monday morning, shedding as much as 5.7%. As of 1:33 p.m. ET, the stock was still down 2.5%.
The catalyst that pushed the stock lower was a downgrade and a bearish forecast by a Wall Street investment firm.
A sizable secondary?
Super Micro Computer, also called Supermicro, has been on fire in 2023, gaining more than 230% so far this year through Friday's market close.
The dour outlook came courtesy of analyst Mehdi Hosseini at Susquehanna, who downgraded Supermicro to negative (sell) from neutral (hold), while slashing its price target to $160, down from $240. This downgrade suggests the stock is set to fall 41% compared to its closing price on Friday.
While the analyst "applauds" the company's strategy, which allows buyers to highly customize their server setups, he cites increasing margin pressure as a factor in the downgrade.
Is the stock still a buy?
Another reason cited by the analyst was the stock's valuation, which might seem counterintuitive. Supermicro is currently selling for just 16 times forward earnings and roughly 1 times sales, which seems inexpensive at first glance. Despite the artificial intelligence (AI) connection, many on Wall Street view Supermicro through the lens of its classification in the computer hardware industry.
As pointed out by my colleague Leo Sun, Supermicro is "more richly valued" than Dell Technologies and Hewlett Packard Enterprise -- two of its better-known rivals -- which are currently selling for 10 times and 8 times forward earnings, respectively.
Yet some believe Supermicro is stealing market share from its competitors. One person in that camp is Northland Capital Markets analyst Nehal Chokshi. The analyst maintains an outperform (buy) rating on the shares and a price target of $395, suggesting potential upside of 45% compared to Friday's closing price.
Chokshi suggests Supermicro will continue to gain share. "We expect Super Micro's market share in the AI field to grow from 7% in March to an astonishing 17%" the analyst noted.
Given Supermicro's market share gains, the stock is deserving of a premium valuation, particularly since it's taking share from the aforementioned rivals.
