Demand for artificial intelligence (AI) has run riot over the past year or so, and nowhere is that more evident than with Super Micro Computer (SMCI -3.54%), also called Supermicro. The company, which provides specialty servers with the computational horsepower necessary to run AI systems, has seen its stock price explode, up an astonishing 757% over the past year as of the market close on Monday.
At the same time, analysts are scrambling to update their financial models and price targets, as Supermicro's results continue to defy gravity.
What does this mean for investors who sat out Supermicro's recent rally? Should they buy the stock in anticipation of further gains or avoid it entirely because of its recent run-up? Let's see what the evidence suggests.
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The year AI came of age
While AI has been around for decades, recent advances in the field of generative AI have the potential to be game-changing. What sets these algorithms apart from their predecessors is the ability to increase the productivity of the workers who use them. These systems can summarize and draft emails, create presentations from available data, and even write and debug computer code, among many other applications. The excitement around AI is palpable as businesses scramble to adopt this next-generation technology.
That's where Supermicro comes in. The company specializes in servers designed to handle the rigors of AI processing, delivering rack-scale plug-and-play solutions that speed up customer deployment. Furthermore, Supermicro offers free-air, liquid-cooling, and air-cooling technologies, with something for every use case.
To meet the accelerating demand, Supermicro is increasing its production capacity to $25 billion, a significant increase from the revenue of $9.25 billion it generated over the trailing-12-month period. Furthermore, its current production utilization rate stands at 65%, which gives the company plenty of time to get its new facilities up and running to meet the growing demand.
Show me the money
A quick review of Supermicro's recent results paints a compelling picture. For the company's fiscal 2024 second quarter (ended Dec. 31, 2023), Supermicro generated record revenue of $3.66 billion, soaring 103% year over year and 73% sequentially. At the same time, diluted earnings per share of $5.10 surged 85%, even as management ramped up research and development spending by 54%. This situation supports the company's plan to more than double its current portfolio of AI products over the coming year.
What's more, management expects Supermicro's growth spurt to accelerate. The company is guiding for third-quarter revenue of $3.9 billion at the midpoint, which would represent 205% year-over-year growth.
A new, Street-high price target
On Tuesday, Rosenblatt Securities analyst Hans Mosesmann maintained his buy rating on Supermicro shares, while raising his price target to a Wall Street-high $1,300. This outlook suggests a 72% upside potential from Monday's closing price.
The analyst believes Supermicro will continue to benefit from the AI boom. Mosesmann goes further, suggesting that the company will continue to benefit not only from the secular AI tailwinds but also from "material [market] share gains" in the server market.
This outlook suggests that despite the enthusiasm that has driven the stock higher, estimates might well be conservative.
How to approach Supermicro stock now
Given the company's explosive growth, you might expect Supermicro to be exorbitantly expensive -- but that simply isn't the case. The stock is currently selling for just 2 times forward sales, which is the benchmark for an undervalued stock.
This bargain-basement valuation, combined with the company's ongoing growth spurt and the secular tailwinds of AI, help illustrate that it's not too late to buy Supermicro stock. But don't expect this fire sale to last long.
