Super Micro Computer (SMCI +24.38%) has been on a tear in 2024, clocking outstanding gains of 216% already as investors have been buying shares of this server manufacturer hand over fist to take advantage of its outstanding growth.
Supermicro's red-hot rally has brought its stock price to around $950. That's almost in line with the 12-month median price target of $949, according to 18 analysts covering the stock. The median price target suggests that Supermicro may not have more upside to offer. However, the Street-high price target of $1,350 points toward 31% gains from current levels.
However, will Supermicro be able to crush these expectations and head to $1,500 in the long run? If yes, how soon can investors expect that milestone to arrive? Let's try and find the answers to these questions.
NASDAQ: SMCI
Key Data Points
Super Micro Computer is built for more upside
Supermicro's stunning 2024 rally explains why the stock is now trading at almost 74 times trailing earnings. That's significantly higher than the company's five-year average price-to-earnings (P/E) ratio of 16. However, as the following chart indicates, Supermicro's bottom-line growth has taken off big-time in the past couple of years, which justifies the rich earnings multiple it currently commands.
SMCI EPS Diluted (TTM) data by YCharts
Even better, Supermicro's earnings growth potential is so solid that its forward earnings multiples are substantially lower than the trailing P/E ratio.
SMCI PE Ratio data by YCharts
More specifically, analysts are expecting the company's earnings to increase 87% in the current fiscal year to $22.10 per share. In the next fiscal year as well, Supermicro is forecast to deliver a robust jump of 39% in earnings to $30.82 per share. The forecast for the next five years remains solid as well, with consensus estimates projecting Supermicro's earnings to increase at an annual pace of 48%.
Supermicro finished its previous fiscal year with adjusted earnings of $11.81 per share. Applying the projected five-year annual growth rate of 48% to last year's earnings, Supermicro's bottom line could jump to just under $84 per share within the next five years. The Nasdaq-100 sports a forward earnings multiple of 27, and assuming Supermicro trades at a similar multiple after five years (using the index as a proxy for tech stocks), its stock price could hit $2,268 within the next five years.
That's well above the $1,500 mark that we are trying to find. However, if we dial back a year and calculate Supermicro's potential earnings after four years using the inputs mentioned above, its bottom line could jump to just over $56 a share. Multiplying the estimated earnings after four years with the Nasdaq's forward earnings multiple of 27 points toward a stock price of $1,512.
So, the $1,500 milestone could arrive for Supermicro within the next four years, assuming management doesn't execute a stock split. However, don't be surprised to see that mark arriving sooner as Supermicro is taking steps to capitalize on the rapidly growing artificial intelligence (AI) server market, which could help it achieve faster earnings growth.
This big catalyst could supercharge its bottom-line growth
The pace at which analysts are expecting Supermicro's earnings to grow may not be considering the company's expanding production capacity, which should allow it to deliver stronger-than-expected growth. This is evident from the fact that the company's revenue is expected to jump to just over $22 billion after a couple of fiscal years.
SMCI Revenue Estimates for Current Fiscal Year data by YCharts
However, Supermicro has expanded its capacity to support $25 billion in annual revenue. It won't be surprising to see the company selling out that entire revenue capacity as the production utilization rate of its plants stood at 65% in the previous quarter, and management pointed out that the remaining capacity is filling up quickly. But more importantly, Supermicro is undertaking initiatives to further enhance its manufacturing capacity.
That's the right thing to do considering that the size of the AI server market could increase sixfold from 2023 to $150 billion in 2027. As such, there is a possibility that Super Micro Computer's growth could be higher than what analysts are forecasting, and that's the reason why this AI stock could achieve the $1,500 stock price target earlier than the four-year time frame discussed above.
