It's an artificial intelligence (AI) market -- we're just living in it. Anything associated with AI has soared in the last year, along with any perceived "winner" from the AI revolution that we may or may not be currently experiencing.
Just look at Nvidia. The "Magnificent Seven" stock is up over 250% in the past year, making it the third-largest company in the world by market cap.
But there is a hotter AI stock than even Nvidia. Enter Super Micro Computer (SMCI 8.89%). The stock of the data center builder and service provider is up 1,000% in the last 12 months and nearly 6,000% in the last five years as companies turn to it for AI infrastructure buildouts.
Is it too late to buy Super Micro Computer stock? Let's take a look and find out.
What the heck does Super Micro Computer do?
Super Micro Computer specializes in assembling customers' computer servers for data centers, cloud computing, AI, and edge computing. It also sells software services to help run these packaged systems.
This is valuable for two key reasons. First, assembling modern computing architecture is complex and requires engineering expertise. Not every company can do this on its own and therefore looks to outsource this to contractors like Super Micro.
Second, efficiency in computing can mean huge cost savings. There are hundreds of billions of dollars spent on computing infrastructure every year. If Super Micro can build products even slightly more efficiently than the competition, that could mean billions of dollars in customer savings.
Today, that means taking computer chips from the likes of Nvidia, Advanced Micro Devices, and others to assemble fast and efficient data centers that power AI tools. The company is emerging as the clear leader in this category with projected revenue of about $14.5 billion for this fiscal year. Three years ago, Super Micro generated just $3.6 billion in revenue.
Fast growth, low margins, inconsistent cash flow
With such rapid growth, Super Micro has been declared an AI winner. Its stock is soaring and now boasts a market cap of $56.2 billion. With revenue growing at a triple-digit rate, you might be tempted to think the stock is not that expensive after this recent run-up.
But when you look under the hood, you'll realize revenue is not the best way to value Super Micro. For one, it has a very low gross margin, just 15.5% in its most recent quarter (excluding stock-based compensation).
This isn't the end of the world -- the company is still profitable -- but it shows that a lot of revenue is just passing along the costs of the computer chips it buys to its data center customers. Using revenue to value this stock will mislead investors.
It also has inconsistent cash flow generation. Free cash flow has jumped around the last few years and was in fact negative over the last 12 months even with operating income climbing higher.
This isn't the end of the world, but it will make it more difficult for the company to self-finance its growth ambitions. Compare this to an asset-light business like Nvidia that generates cash flow in line with earnings, and you can see that Super Micro has a less-than-ideal business model. This should not be ignored by investors.
Data by YCharts.
Don't get caught up in the hype
There's a lot of hype around the company with the stock up 10-fold in just one year. A lot of this hype may be deserved, but don't get blinded by a rising stock: Super Micro is a bad bet right now.
The stock trades at a price-to-earnings ratio of 88 -- or more than triple the S&P 500 average -- while already seeing a huge boost from the AI revolution. Buying today means you not only believe in the consensus growth from AI and how it will help Super Micro but that it will be significantly bigger than most people think. Is that a smart bet to make? I doubt it.
The stock today comes with a lot of risks and little potential reward. If the AI revolution is real and sustainable, a lot of this growth is already priced into the stock. And if it's a bubble? Watch out -- investors could be in for one rude awakening. Avoid Super Micro Computer at these prices. The juice isn't worth the squeeze anymore.
