Super Micro Computer (SMCI -14.03%), more commonly known as Supermicro, saw its shares skyrocket by 2,380% over the past three years. The server maker was also added to the S&P 500 this March and has a market cap of $57 billion.
Yet Supermicro is still less valuable than its rival Dell Technologies (DELL -4.70%), which has a market cap of $86 billion, currently leads the server market, and is expected to generate more than 6 times as much revenue as Supermicro in its current fiscal year.
So could Supermicro catch up to Dell and eclipse its market cap in the near future?
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Why is Supermicro growing faster than Dell?
Supermicro and Dell both produce servers, but they operate different business models. Supermicro mainly sells high-performance servers, and its close relationship with Nvidia grants it access to the chipmaker's top-tier data center GPUs before many of its larger competitors.
Supermicro's revenue grew at a compound annual growth rate (CAGR) of 29% from fiscal 2020 to fiscal 2023 (which ended last August) as the explosive growth of the artificial intelligence (AI) market drove more companies to ramp up their purchases of its dedicated AI servers. At the end of fiscal 2023, Supermicro said it generated roughly half of its revenue from its AI servers.
From fiscal 2021 to fiscal 2024 (which ended this February), Dell's revenue declined at a CAGR of negative 2%. Its growth stalled out because it still generated most of its revenue from PCs, data storage devices, and legacy servers. Its PC sales slowed as pandemic pressures eased while rising rates and other macro headwinds curbed its sales of storage devices and legacy servers. Unlike Supermicro, Dell doesn't disclose the exact percentage of its revenue that comes from AI servers.
Supermicro only controls about 7% of the server market, according to Barclays, while Dell remains the clear leader with a high-teens share. But Supermicro also controls 10% of the niche AI server market, according to Bank of America, and that figure could climb to 17% within the next three years.
Could Supermicro become bigger than Dell?
Global Market Insights expects the entire AI server market to expand at a CAGR of 18% from 2024 to 2032. So if Supermicro keeps pace with the market's growth, maintains its tight relationship with Nvidia, rolls out new AI servers powered by Advanced Micro Devices' new data center GPUs, and continues to expand its share of the AI server market, it could generate much bigger gains than Dell over the next decade.
From fiscal 2023 to fiscal 2026, analysts expect Supermicro's revenue to rise at a CAGR of 46% from $7.1 billion to $22.1 billion as its earnings per share (EPS) increases at a CAGR of 41%. If you believe it can hit those rosy targets, then its stock still looks reasonably valued at 32 times next year's earnings and 2.5 times next year's sales.
By comparison, Dell has set a conservative long-term goal of growing its annual revenue by 3% to 4% and its EPS by at least 8% every year. It expects that steady growth to be driven by the stabilization of the PC market, its higher sales of AI servers, and the recovery of its data storage solutions business in a warmer macro environment.
From fiscal 2024 to fiscal 2027, analysts expect Dell's revenue to increase at a CAGR of 5.5% from $88.4 billion to $104 billion as its EPS grows at a CAGR of 7%. Dell trades at just 16 times its forward adjusted earnings and 1 time next year's sales, making it seem cheaper than Supermicro, but it arguably deserves those lower valuations.
Assuming both companies' valuations hold steady, Supermicro's market cap won't come anywhere close to eclipsing Dell's within the next three years. It should also still control a smaller slice of the server market than Dell. Therefore, you can't call Supermicro the "next Dell" yet -- but this growing underdog could generate much bigger gains than its larger competitor over the next few years as the AI server market expands.
