Artificial intelligence (AI) came of age in 2023, and while the technology has been around in one form or another for decades, recent advances have captivated Wall Street and Main Street alike. As a result of the ensuing AI gold rush, investors are taking a fresh look at companies best suited to profit from the latest secular tailwinds.
One such company is Super Micro Computer (SMCI -3.54%), also known as Supermicro. The company has been supplying high-end servers since 1993 but has only recently captured the attention of some investors. The reason? Supermicro specializes in highly customizable, energy-efficient servers that are tailor-made for the rigors of hyperscale data centers and AI.
Adoption of AI has only just begun and many businesses are scrambling to integrate these next-generation algorithms into their operations. Many of these companies have turned to Supermicro to ensure they have the computing horsepower necessary to take the next step into the AI revolution.
Let's look at three reasons investors should be buying up shares of Supermicro stock like there's no tomorrow.
Image source: Getty Images.
1. Supermicro is going through an incredible (and ongoing) growth spurt
The advent of AI has provided a notable acceleration in Supermicro's already brisk business. In its fiscal 2024 second quarter (ended Dec. 31), Supermicro generated record revenue of $3.66 billion, soaring 103% year over year and 73% sequentially. To put that performance into perspective, not only was this the first time the company achieved more than $3 billion in quarterly revenue, but it also surpassed Supermicro's entire annual revenue from 2021. The results were driven by record and accelerating demand for AI servers. This resulted in adjusted earnings per share (EPS) of $5.59, which jumped 62%.
As impressive as its results were, it was Supermicro's forecast that caught Wall Street off guard. The company raised its full 2024 fiscal year revenue estimate to $14.5 billion at the midpoint of its guidance, up from $10.5 billion -- a massive 38% increase. Furthermore, that would amount to more than 100% revenue growth for the full fiscal year.
If you'll excuse the cliché, this paints the picture of a company firing on all cylinders.
2. Super Micro Computer is stealing market share from its rivals
While the competition has long been focused on general-purpose servers, Supermicro has worked hand-in-hand with chip makers to ensure its rack-scale systems perform at the highest level, eking out the best performance with the lowest power consumption possible. These partners include Nvidia, Advanced Micro Devices, and Intel, among others.
By partnering with these high-demand chipmakers, Supermicro has been growing faster than the overall industry, which shows that the company is stealing share from its rivals. While estimates vary, analysts at Northland suggest that Supermicro controlled roughly 11% of the generative AI server market over the past year, which leaves "plenty of room for future share gains."
Another telltale sign is the company's growth. Management suggests Supermicro has grown more than five times faster than the industry average over the preceding 12 months, another sign the company is stealing market share.
That trend should continue. The company is in the process of bringing its new Malaysia facility online, which will increase Supermicro's production capabilities. This, along with other manufacturing facilities, will bring the company's annual revenue capacity to $25 billion annually.
3. Supermicro has a surprisingly cheap valuation
To be fair, Supermicro comes with a fair degree of short-term risk. The stock has gained an astounding 779% over the past year (as of this writing). As such, the stock could become the victim of its own success, subject to a much greater degree of volatility than one would normally expect.
Which leads right into Supermicro's valuation. Investors will rightly point out that the stock sells for a frothy 62 times earnings and 5 times sales -- but that view is myopic, as those metrics are backward-looking and fail to capture the stock's phenomenal growth rate. The much more appropriate forward price/earnings-to-growth (PEG) ratio reveals a valuation of less than 1 -- the benchmark for an undervalued stock.
Given the company's ongoing growth spurt, increasing market share gains, and surprisingly cheap valuation, I would argue now is the time to buy Super Micro Computer like there's no tomorrow -- but buckle up for the inevitably volatility to come.
