With share prices up by 49% in the first three weeks of 2024, Super Micro Computer (SMCI 3.84%) has hit the ground running in the new year. This latest move caps off an almost 500% rally over the last 12 months as investors become increasingly optimistic about its potential in generative artificial intelligence (AI) infrastructure.
Let's discuss what the next three years could have in store for the company.
What does the guidance upgrade mean for investors?
On Jan. 19, Super Micro released its preliminary results for its fiscal second quarter, which ended in December. With expected revenue in the range of $3.6 billion to $3.65 billion, it will dramatically exceed both its best-case prediction of $2.9 billion and the analyst consensus of $3.06 billion -- all thanks to one growth engine: AI.
Although not as well known as other AI hardware giants like Nvidia (NVDA 0.03%) and Advanced Micro Devices (NASDAQ: AMD), Super Micro plays a key role in this fast-growing industry by using graphics processing units (GPUs) and other chips to assemble complete computer servers for websites, data storage, and complex AI applications.
The company helps turn Nvidia chips into ready-to-use systems for the end user, so it enjoys some spillover effects from its partner's success amid booming AI demand.
What could the next three years bring?
Super Micro depends on Nvidia for a lot of its revenue because it needs the chipmaker to allocate a portion of the GPUs it produces. However, over the next three years, Super Micro's innovations in server design and efficiency could play a growing role in its continued success.
According to analysts at Rosenblatt Securities, part of Super Micro's guidance beat could be because of increased demand for its liquid cooling for data centers. Compared to traditional air-cooling methods, liquid cooling is more efficient at removing heat from a system to prevent it from damaging equipment.
Such features are becoming more important as businesses manage increasingly demanding workloads while running and training AI applications.
In years to come, rising demand for liquid cooling could expand the company's total addressable market and reduce its reliance on third-party chip suppliers for growth.
What about the valuation?
Over the last two years, Super Micro's revenue and profits have gone parabolic in response to the rising AI chip demand in data centers. And industry experts remain optimistic that the boom can continue. CEO Lisa Su of AMD expects the total market to rise almost tenfold from $45 billion to $400 billion by 2027.
SMCI net income (TTM) data by YCharts; TTM = trailing 12 months.
With all this in mind, Super Micro's stock looks relatively cheap, with its price-to-earnings (P/E) multiple of just 22 compared to the S&P 500 average P/E of 26.
But while the stock looks like a buy, part of its valuation discount could be due to concerns about its dependency on third-party suppliers like Nvidia to generate growth.
Before taking a position in Super Micro, investors might want to wait for a few more quarters of data to evaluate the company's progress in diversifying its revenue streams.
