One of the crown jewels of the artificial intelligence (AI) gold rush is Super Micro Computer (SMCI 8.89%), also known as Supermicro. The stock generated blistering gains of 246% in 2023 but is already up an astonishing 301% so far this year, as of the market close on Friday, regularly notching new all-time highs.
The company, best known for its specialty servers used to facilitate AI processing, has emerged as an odds-on favorite in the movement, stealing market share from its larger rivals.
This leaves investors in a dilemma. After clocking 1,290% gains in roughly 14 months, is Supermicro stock still a buy? Let's dig in to see what the evidence suggests.
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How Supermicro became the gold standard
While Supermicro might seem like an overnight success, the company has been manufacturing servers for more than 30 years. The company has long delivered custom servers outfitted with the latest and greatest technology, but by focusing on energy efficiency, it lowers the total cost of ownership for its customers. Supermicro's rack-scale plug-and-play solutions and building block architecture allows customers to buy what they need and easily increase the size of their system as required.
Furthermore, by offering free-air, liquid-cooling, and traditional air-cooling technology, Supermicro offers AI-centric server solutions for every budget and technology level.
The company is able to accomplish this feat by working closely with its suppliers, including Nvidia, Intel, and Advanced Micro Devices, to ensure its servers work seamlessly with the industry's most up-to-the-minute AI-centric processors. It also ensures the company has access to critical supply components.
Supermicro isn't stopping there. The company has taken a number of steps to position itself for the future. The company is expanding its manufacturing facilities both here and abroad, which will increase its economies of scale and give Supermicro the capacity to serve a total addressable market of $25 billion -- well ahead of its trailing-12-month revenue of roughly $9.3 billion. Supermicro also just floated $1.5 billion in convertible notes to help fund and accelerate its manufacturing expansion to meet the growing demand for AI solutions.
Furthermore, Supermicro has been using its expertise in the AI market to steal market share from its rivals. Barclays analyst George Wang suggests that Supermicro "has 7% market share globally, implying further share gains ahead are likely." In his opinion, Supermicro is taking share from the likes of Dell Technologies and Hewlett Packard Enterprise, and that power shift is expected to continue for the foreseeable future.
Supermicro's growth is off the charts
The aforementioned race to adopt AI has supercharged Supermicro's growth. For the company's fiscal 2024 second quarter, ended Dec. 31, Supermicro generated record revenue that soared to $3.66 billion, up 103% year over year and 73% sequentially. At the same time, diluted earnings per share surged 85% to $5.10.
Management expects the company's growth spurt to accelerate. Supermicro is guiding third-quarter revenue to $3.9 billion at the midpoint of its guidance range, which would represent 205% year-over-year growth.
CEO Charles Liang went even further, saying, "I feel very confident that this AI boom will continue for... many quarters, if not many years." If he's right, and I believe he is, there's a long runway for growth ahead for Supermicro.
Is Supermicro stock expensive?
Supermicro stock has been on fire since the beginning of 2023, so it stands to reason that the stock's valuation would have increased accordingly. And at first glance, that appears to be the case.
Based on its price-to-earnings (P/E) ratio of 89, the stock appears wildly expensive, more than triple the average valuation of the S&P 500 index. Furthermore, at 7 times sales, the stock still appears expensive, as a reasonable price-to-sales ratio is generally considered to be between 1 and 2. The two most commonly employed valuation metrics seem to suggest the stock is simply too expensive, but that view is myopic.
Why? Because both these metrics look to the past and fail to consider Supermicro's triple-digit growth story. For that, we turn to the more fitting price/earnings-to-growth ratio, which values Supermicro at less than 1, the benchmark for an undervalued stock.
Since the market is forward looking, investors should endeavor to know not only where a stock has been in terms of valuation, but where it's going as well.
A vast and growing opportunity
It's been just over a year since generative AI first burst on the scene, and adoption continues to accelerate thanks to the productivity gains AI has made possible. And novel use cases are still being discovered at a rapid clip.
Estimates regarding the potential size of the AI market abound, but one moderate view suggests that generative AI could be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.
To be clear, I think Supermicro's streak of triple-digit gains should end within the coming year, giving way to more moderate, though still impressive, growth. However, the breadth of Supermicro's AI-centric server offerings and ongoing market gains, combined with a massive opportunity and reasonable price tag, suggests investors should at least consider buying the stock and picking up shares on any weakness.
