When it comes to artificial intelligence (AI), the majority of attention lands on the "Magnificent Seven" -- a catchy moniker used to describe the world's most valuable technology businesses: Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla.
Among this small group, Nvidia might be the most important. The chipmaker's breakthroughs in networking are supercharging generative AI applications including machine learning and large language models (LLMs).
One company that has started to become affiliated with Nvidia is Super Micro Computer (SMCI +4.16%). The company works extremely closely with Nvidia, and as such, this relationship has served as a bellwether for Supermicro (as it's commonly known).
Over the past year, shares in Supermicro have soared 1,180%. Given the meteoric rise, investors may be wondering if they've missed the boat. Let's take a look at the full picture and assess if buying shares of Supermicro stock makes sense right now.
NASDAQ: SMCI
Key Data Points
The next Nvidia?
Supermicro's close ties to Nvidia have some investors thinking the company could be the next big breakout tech stock. However, it's paramount to understand that Nvidia and Supermicro are very different businesses.
Nvidia is a semiconductor company. By contrast, Supermicro is an IT architecture operation. The company helps semiconductor businesses design server racks and storage clusters.
Given the demand for Nvidia's graphics processing units (GPUs) and data center services, it's not a surprise to learn that Supermicro's business has been on a roll. So while Supermicro could be seen as a "stealth Nvidia," investors should realize that an investment in the stock represents more of a hedge to other AI positions you may own.
Image source: Getty Images.
Take a look underneath the hood
The chart below illustrates Supermicro's quarterly revenue trends for the last decade. With sales growing over 100% annually, it would appear that Supermicro is on quite a roll.
SMCI Revenue (Quarterly) data by YCharts
However, taking a look further down the income statement sheds light on some important features of Supermicro's business. Namely, Supermicro has ratcheted up expenses to invest in more design innovations as well as market share acquisition strategies.
As a result, the company's margins are deteriorating. In other words, despite unprecedented revenue growth, the company's margins are falling. This dynamic could have material impacts on the long-term sustainability of the business, as it could result in extended cash-flow burn or even a liquidity crunch.
Is now a good time buy Supermicro stock?
I'd argue that shares of Supermicro have soared for the wrong reasons. The stock trades almost in tandem with Nvidia despite the two being tangentially related businesses, at best.
The chart below shows that Supermicro's price-to-sales (P/S) multiple has not only extended in recent months, but is materially higher than its peers. In fact, its P/S ratio of 7.3 is more than double that of its next closest competitor, IBM -- which is a much larger, diversified company.
SMCI PS Ratio data by YCharts
I personally have concerns over the prospects of long-term sustained profitability given Supermicro's low margin profile. As competition in the chip race heats up, it's likely that Supermicro's relationship with Nvidia will become less valuable. Given these variables, a prudent strategy is to keep an eye on Supermicro's operating performance.
In the long run, having some exposure to the company might not hurt as Supermicro provides an under-the-radar pocket within the overall AI realm. But for now, I'd avoid the momentum fueling its shares.
