Finding the next great stock, like an Amazon or, more recently, Nvidia (NVDA +0.19%), is the dream -- one stock that can generate portfolio- and life-changing returns, sometimes very quickly. Super Micro Computer (SMCI +0.89%) has given investors its best Nvidia impression. The stock is up a whopping 750% over the past year.
Now, a stock rarely goes up that much, that quickly. That's why it might seem wild that I'm predicting it will continue. Of course, success may not be a straight line. Still, I believe Supermicro, as it is better known these days, could easily mimic Nvidia's epic multiyear run and soar upward over the coming years.
Supermicro is becoming the market leader in its field
The recipe for Supermicro's success is simple. Dominant leadership in a rapidly growing industry equals outperformance. Investors are already seeing the equation play out, which helps explain the stock's remarkable success. My prediction is based on the simple theory that artificial intelligence (AI) spending will continue well into the future.
First, the basics. Supermicro is a computing hardware innovator. It began with motherboards in the early 1990s but today sells turn-key modular server systems to corporations. Do you know how to build a computer from scratch? Neither do many companies. So, like most would do, they turn to an expert like Supermicro.
Supermicro's modular system can be easily scaled to the size a company needs and can be built upon in the future if needs grow. Like Nvidia's AI chips, customers are flocking to Supermicro for their AI needs:
Image source: Super Micro Computer.
Management is basing this on its internal data and industry data from Gartner. Supermicro's revenue grew 103% year over year in the second quarter of fiscal year 2024 (ended Dec. 31, 2023), and guidance is for up to 218% year-over-year growth in the current quarter.
A rapidly growing industry
The million-dollar question, of course, is whether this can last. According to the people most connected to AI, it can and will. OpenAI CEO Sam Altman recently made headlines for his call to expand global chip capacity, claiming a need to invest trillions of dollars for the cause. Nvidia CEO Jensen Huang predicted an additional $1 trillion in data center spending over the next several years.
NASDAQ: SMCI
Key Data Points
If these predictions are remotely accurate, Supermicro, which just did $3.7 billion in revenue in Q2, is poised to have more opportunities than it can shake a stick at. Ultimately, this has to play out, and an inability to support demand could send business to Supermicro's competitors. However, it's hard to see how Super Micro Computer doesn't have every opportunity to fulfill these skyrocketing expectations for long-term growth.
A surprisingly reasonable valuation
Given the abovementioned situation, it's reasonable to expect growth estimates to rise. That's happened already. Analysts are looking for earnings growth averaging 48% annually over the long term. This seems realistic for a company now growing at a triple-digit rate.
At a forward P/E ratio of just 40, Supermicro's price/earnings-to-growth (PEG) ratio is less than 1, signaling that the stock is still a bargain for its expected future growth potential.
SMCI PE Ratio (Forward) data by YCharts
There's a fascinating psychological phenomenon called anchoring bias, in which the mind sticks to the first number it sees. In other words, investors see how much Supermicro has climbed over the past year and assume that the stock must be expensive. To be fair, most stocks are overpriced if they rise that much in a year.
However, data shows that Supermicro could be the exception. Now, there are investment risks because you are projecting things in the future. Nothing is guaranteed in life. However, the data and recent financial performance indicate a bright future for Super Micro Computer and its shareholders.
