Super Micro Computer (SMCI 8.89%), more commonly known as Supermicro, has likely made enormous profits for investors over the years. The producer of high-performance servers went public at $8 on March 29, 2007, and it now trades at about $423.
A $20,000 investment in Supermicro stock at the time of its IPO would be worth $1.06 million today. The lion's share of those gains, however, occurred within the past couple of years.
Supermicro's growth was driven by robust sales of its high-end servers, and those sales have accelerated as the artificial intelligence (AI) market expanded. Its close partnership with Nvidia (NVDA 6.18%) also granted it access to the chipmaker's top-tier server GPUs before Supermicro's larger competitors, and the company carved out a high-growth niche in the saturated server market.
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But even after its massive rally in 2022 and 2023, Supermicro still has a modest enterprise value of $23 billion and looks reasonably valued at 21 times next year's expected earnings. So could this hot AI stock turn a fresh $20,000 investment into more than $1 million again?
How fast is Supermicro growing?
From its fiscal 2007 through its fiscal 2021 (which ended in June 2021), Supermicro's revenue grew at a compound annual rate of 16%. That fairly stable growth was driven by the expansion of the cloud, data center, edge computing, 5G, and AI markets.
However, the development of new generative AI platforms lit a fire under Supermicro's business. The company's revenue surged by 46% in fiscal 2022 and 37% in fiscal 2023, and analysts expect 61% growth in fiscal 2024.
From fiscal 2023 to fiscal 2026, analysts expect Supermicro's revenue to rise at a compound annual rate of 26%. That growth should be driven by three catalysts: its partnership with Nvidia, market share gains in AI servers, and the expansion of the generative AI market -- which Fortune Business Insights forecasts will grow at a compound annual rate of 48% from 2022 to 2030.
The mathematical path to $1 million
If Supermicro's valuations hold steady, the company would need to grow revenue at a compound annual rate of 17% for 25 years to turn a $20,000 investment into $1 million. That goal seems achievable relative to its past growth, but the company could face three major challenges.
First, Supermicro still controls a much smaller slice of the pre-built server market than Hewlett Packard Enterprise (HPE 1.18%) or Dell (DELL 0.12%). Both of those larger competitors could strike back at Supermicro with new AI servers, sign similar deals with Nvidia, and lure away its potential customers with cheaper hardware.
Second, the AI market could cool after the buying frenzy in AI chips and servers over the past two years. That would be bad news for Supermicro, which now generates about half of its revenue from its dedicated AI servers. If that core growth engine slows, its stock could be revalued to reflect a view of the company as a legacy server maker instead of a hot AI stock.
HPE and Dell, which are both growing slower than Supermicro, trade at 8 and 12 times forward earnings, respectively. If investors decide that Supermicro belongs in the same basket as those two older server makers, its stock price could be cut in half.
Lastly, we can expect that a few recessions will occur over the next 25 years. Large companies will inevitably rein in spending on big AI upgrades during those downturns -- and as the underdog, Supermicro could struggle more than HPE and Dell under those market conditions.
It's a good long-term play on the AI market
Supermicro should keep growing, but it's quickly becoming an all-in bet on the AI market. If the company can maintain its tight partnership with Nvidia and continue to grow its share of the nascent AI server market, then it could still be a millionaire-maker stock. But it could be a bumpy ride -- and investors should keep a close eye on Supermicro's competition and rising valuations.
