Super Micro Computer (SMCI -1.83%), more commonly known as Supermicro, has generated massive returns since its IPO in 2007. The producer of pre-built servers went public at $8, and its stock now trades at about $290 per share.
But even after that 3,550% rally, Supermicro has never split its stock. Could it finally split its high-flying stock in the near future to bring its price back down to the double digits?
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Why did Supermicro's stock skyrocket?
Supermicro didn't attract much attention after its IPO because it seemed like a tiny underdog in the server market. However, the company still carved out a niche by building high-performance and high-efficiency servers for more demanding tasks.
As a result, its revenue rose at a compound annual growth rate (CAGR) of 17% from fiscal 2007 to fiscal 2020 (which ended in June 2020). But from fiscal 2020 to fiscal 2023, its revenue growth accelerated to a three-year CAGR of 29% as the growth of the artificial intelligence (AI) market lit a fire under its business and stock price.
The main spark was Supermicro's longtime partnership with Nvidia, which granted it access to its top-tier data center GPUs before other dedicated server makers. Many of the world's top AI platforms, including OpenAI's ChatGPT, use Nvidia's GPUs to process complex AI tasks -- and the growth of that market drove many companies to buy Supermicro's pre-built AI servers. It now sells its high-end servers to more than 1,000 customers in over 100 countries.
Supermicro still controls a much smaller slice of the server market than Hewlett Packard Enterprise and Dell, but it continues to grow at a much faster rate as it expands its share of the niche AI server market. Analysts expect its revenue to continue growing at a CAGR of 22% from fiscal 2023 to fiscal 2026.
Will a stock split make Supermicro's stock more attractive?
Most brokerages allow investors to make fractional trades now, so stock splits don't matter as much as they used to. If Supermicro does a 10-for-1 split to reduce its price from $290 to $29, it would simply be selling you a tenth of the exact same stock at a tenth of the price. The stock's market cap and valuations would remain exactly the same.
That said, reducing its stock price from the triple digits to the double digits might generate some fresh media buzz and attract the attention of smaller retail investors. It would also make it easier to trade options for Supermicro since a single options contract is tethered to 100 shares. That increased options trading could boost the stock's liquidity and attract more active traders, but shouldn't impact its long-term growth, which is still tethered to the secular growth of the AI market.
Supermicro hasn't said anything about splitting its stock, but I wouldn't be too surprised if it capitalizes on the AI hype and splits its shares in the near future.
What should long-term investors focus on?
Instead of wondering if Supermicro will ever split its stock, investors should focus on its growth potential and valuations. As long as the AI market continues to expand and the company maintains its close partnership with Nvidia, its sales and profits should keep rising. Its stock also looks surprisingly cheap at 15 times next year's earnings, because the market is still valuing it as a legacy server maker instead of an AI growth stock.
I believe Supermicro still has a bright future. It's carved out a high-growth niche in a slow-growth market, it continues to gain ground against HPE and Dell in the broader server market, and its stock seems undervalued relative to its growth potential. All of those strengths make it a great long-term investment -- regardless of whether or not it splits its high-flying shares.
