After more than tripling just so far in 2024, the rally in shares of Super Micro Computer (SMCI 8.89%) continued Monday. Supermicro, as it's known, will be added to the S&P 500 index before the opening of trading on March 18.
That's just the latest catalyst for the stock of the maker of servers for artificial intelligence (AI) applications. And it shouldn't be unexpected since the stock's market cap has now soared to about $60 billion. What investors need to know now is whether the company is worth that valuation and whether the stock's meteoric rise will continue.
Riding the AI boom
Supermicro's rally comes as investors continue to see more and more companies reporting massive sales growth for AI-related equipment. Nvidia is perhaps the most well-known beneficiary of the AI boom, but even Dell Technologies' shares surged more than 30% last week after it reported robust demand for its AI servers. Supermicro shares have been riding that same AI demand wave.
But Supermicro's valuation only makes sense if its sales and profits are set to continue soaring higher. As demand for computing power for AI applications grows, sales of Supermicro's server solutions should also grow. In fact, sales soared by more than 70% over the last two sequential quarterly periods. The company sees its net sales continuing to increase in the current quarter, though not as quickly.
But it's not just about sales. And profits aren't going to grow as fast as they have for Nvidia. Supermicro's gross profit margin averaged just 16% over the last six months. By comparison, Nvidia's is nearly 5 times that.
The frenzy to own anything AI has driven Supermicro stock to such lofty heights more than the business itself. At some point investors are likely to take profits and reprice Supermicro stock lower.
