Super Micro Computer (SMCI +5.31%) has been the best stock to own in 2024, with few exceptions. So far, it has essentially tripled just two months into the year.
This rise has caused it to cross the $1,000 threshold a few times, but with how pricey the stock is, it has become a bit volatile. But could it cross $1,500 sometime soon? Let's find out.
Supermicro's growth has been impressive
Super Micro Computer (often called Supermicro) is capitalizing on the artificial intelligence (AI) arms race. It is a popular choice for companies looking to source a highly customizable data center server. Because it works closely with GPU maker Nvidia, Supermicro can help squeeze out every ounce of performance from Nvidia's GPUs.
NASDAQ: SMCI
Key Data Points
Like Nvidia, Supermicro is starting to see unreal growth. In the second quarter of fiscal year 2024 (ended Dec. 31), Supermicro's revenue rose 103% year over year to $3.67 billion. But its guidance for the next quarter is what got investors excited.
In the third quarter, it expects revenue from $3.7 to $4.1 billion, indicating 188% to 219% growth. This catalyst was like dumping gas on an already roaring fire, and Supermicro's stock has risen nearly 75% since these results were announced.
But could these projections support a $1,500 stock price?
Supermicro's stock is already priced at a premium
Using trailing earnings to value a company isn't wise for a quickly changing company. Instead, the forward price-to-earnings (P/E) ratio, which includes analyst projections, is a better choice.
Since the calendar flipped to 2024, Supermicro's valuation skyrocketed.
SMCI PE Ratio (Forward) data by YCharts.
When the company entered the year valued at 15 times forward earnings, it was a steal. But at 40 times forward earnings, it no longer holds that designation.
While Supermicro is at the top of its industry, there isn't much difference between its products and those offered by Hewlett-Packard or IBM. But because Supermicro is focused on the server business, it's a pure-play investment, unlike the others. This makes it a more popular stock pick than the other two, which are bogged down by legacy businesses.
It's also worth noting that Supermicro trades at a higher price than Nvidia (32 times forward earnings).
With that kind of valuation, I'd pass on buying Supermicro's stock right now, but that's only a one-year view. Management aims to achieve $25 billion a year in recurring revenue, which changes this analysis completely.
If Supermicro can maintain its 8% profit margin and achieve $25 billion in revenue, that would give it $2 billion in earnings each year. With the stock trading at a $48 billion market cap right now, the company would be at a hypothetical P/E ratio of 24.
For a hardware company, that's either about right or a bit pricey, which is a big red flag for me.
If a company must hit its long-term targets to achieve a reasonable valuation, then it's probably not the best stock pick in the world.
So, could Supermicro's stock hit $1,500? Maybe. But if it does, it will be because market hype pushed it that high or management reassessed their long-term revenue targets. But right now, Super Micro Computer doesn't look attractive, especially when Nvidia can be purchased at a cheaper price.
