It's easy to see that Super Micro Computer (SMCI 8.89%) has been one of stars so far in 2024. The stock is up over 300%, meaning it has quadrupled since the start of the year. Put more plainly, a $1,000 investment on Jan. 1 would now be worth $4,000.
Considering that this maker of high-performance servers started the year with about a $15 billion market value, this rise has been nothing short of impressive. But with that kind of movement, many investors are starting to wonder the same thing: "Should I keep buying, hold, or sell?"
Let's dive deeper into Supermicro (as it's often called) and see if this is the mountain peak or if it's just the beginning of something bigger.
Capitalizing on the AI demand wave
Supermico has benefited heavily by the growing demand for computing infrastructure, notably driven by artificial intelligence (AI) workloads. The workhorse of AI computing is the GPU (graphics processing unit), but a proper setup requires much more than a couple of hundred or thousand GPUs.
This hardware must be properly networked into clusters and other computing components to get the most performance out of it. These servers are built and designed by Supermicro, but what sets Supermicro apart from competitors is its highly customizable products.
Customers can factor in their computer based on workload type and size, making Supermicro's products preferable to those of competitors (like IBM or Hewlett Packard). This preference has shown up in its quarterly results, with its revenue for the second quarter of fiscal 2024 (ended Dec. 31) rising 103% year over year to $3.67 billion.
But that's just the beginning. Next quarter, management expects anywhere from $3.7 billion to $4.1 billion in revenue, indicating 188% to 219% growth. For fiscal 2024, it believes revenue will come in around $14.5 billion, but this is a far cry from where management believes its business will be long-term. Supermicro believes it can generate $25 billion in annual revenue through its total IT solution ecosystem.
This gives credence to the notion that Supermicro's stock may have room for more upside. But that success may already be baked into the stock price.
The stock carries an expensive price tag
Part of Supermicro's impressive rise was that it entered the year undervalued. At just 13 times forward earnings, it was already ripe for a run-up, but no one expected a rise of these proportions. At 52 times forward earnings, Super Micro Computer is far more expensive than AI king Nvidia (which trades at 36 times forward earnings).
SMCI PE Ratio (Forward) data by YCharts
Over the past decade, Supermicro has traded for around 19 times trailing earnings. Using that as the base valuation, we can determine what kind of growth Supermicro needs to revert to its historical levels.
Should management reach its $25 billion revenue goal and maintain its 8% profit margin, Supermicro would earn annual profits of $2 billion. After dividing its current market capitalization ($64 billion) by its hypothetical ideal earnings, you'd get a price-to-earnings (P/E) ratio of 32 at its current stock price -- far above its historical valuation levels.
So, Supermicro will have to achieve its long-term goal, maintain margins, and not increase a single penny above its current price just to trade at a 68% premium over its historical valuation levels. That's not a very good case for the stock.
With that in mind, it's possible (and maybe likely) that Supermicro's stock will continue to rise as many who missed the initial move try to get in on the stock. Super Micro Computer will likely succeed as a business throughout 2024 and beyond, but with all of the assumptions and strong growth baked into the stock price, it's possible that the stock won't have the same success after its dramatic rise.
If I were a shareholder (which I am unfortunately not), I would sell here to lock in some gains.
