Let's cut to the chase: The ability of generative artificial intelligence (AI) to automate certain tasks and increase productivity has captured the attention of businesses everywhere. Generative AI can draft original documents, summarize existing data, create presentations, and even write and debug computer code -- and new use cases are being discovered regularly.
Cathie Wood, the enigmatic founder of Ark Investment Management, has long focused on disruptive innovation, and her view on the potential of generative AI is eye-opening. "AI is going to enable the most massive productivity increase in our history," she said. "The productivity gains are going to be astounding and shocking."
One company at the heart of this secular tailwind is Super Micro Computer (SMCI 8.89%), also known as Supermicro. The stock has ridden the wave of AI higher over the past year, but there could be much more to come.
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Servers of the stars
While it may not be a household name, Supermicro has burst on the scene over the past year or so as one of the leading providers of servers used in enterprise data centers, cloud computing, and AI systems. The company offers a broad selection of servers and storage systems, from full plug-and-play systems to modular components. Supermicro also provides a helping hand to customers to install and upgrade their computing infrastructure.
The company has been developing cutting-edge server and storage systems for more than three decades. So when the opportunity represented by generative AI came knocking, Supermicro was there to answer the call.
Supermicro works closely with Nvidia, Advanced Micro Devices, and Intel, among others, to ensure its servers have a steady supply of -- and work seamlessly with -- the latest and greatest AI-centric processors.
A vast and growing opportunity
While AI has been around for decades, generative AI is the next giant leap forward in the technology. The previously mentioned potential to vastly increase productivity sets the technology apart from its predecessors. Businesses are also looking to gain an edge, and the ability to save time and money has companies of all types looking to get a slice of the pie.
While estimates are a dime a dozen, no one can offer a definitive value of the size of the market. Generative AI could represent a $1.3 trillion market by 2032, according to Bloomberg Intelligence. A more bullish take can be found in Ark Invest's Big Ideas 2024 report, where Cathie Wood suggests that the AI software market alone could generate incremental spending of $13 trillion by the end of the decade. While the size of the market is still elusive, one thing is clear: The opportunity is sizable.
Blockbuster results
Supermicro's results help illustrate the opportunity. For the company's fiscal 2024 second quarter (ended Dec. 31), Supermicro generated net sales of $3.66 billion, which soared 103% year over year and 73% sequentially. At the same time, adjusted earnings per share (EPS) of $5.59 represented a 71% surge. The company noted its record growth was driven by demand for rack-scale systems used for AI.
Management expects the company's growth spurt to continue. Supermicro is forecasting third-quarter revenue in a range of $3.7 billion to $4.1 billion, representing 205% year-over-year growth at the midpoint of its guidance. Profit is also expected to surge, with adjusted EPS of roughly $5.61, up 244%. The company also raised its full fiscal-year revenue guidance to a range of $14.3 billion to $14.7 billion, an increase of at least 100%.
CEO Charles Liang addressed the ongoing demand, noting, "Overall, I feel very confident that this AI boom will continue for another many quarters, if not many years."
Supermicro is chasing a total addressable market it estimates at $25 billion. To meet the strong and growing demand, management has broken ground on two new production facilities near its Silicon Valley headquarters, in addition to the manufacturing facility already slated to come online in Malaysia.
A compelling opportunity
Super Micro Computer stock has been growing like wildfire, up 766% over the past year as of this writing. With gains of that magnitude, you'd be tempted to believe the stock has gotten quite pricey, but nothing could be further from the truth. Despite its parabolic ascent, the stock still trades for just 2 times next year's sales -- the benchmark for an affordable stock.
The bargain-basement price, strong and growing demand for its products, and the secular tailwinds represented by AI illustrate why Supermicro is well positioned to benefit from this once-in-a-generation opportunity.
