Super Micro Computer (SMCI -1.83%), more commonly known as Supermicro, posted its latest earnings report on April 30. For the third quarter of fiscal 2024, which ended on March 31, the server maker's revenue surged 201% year over year to $3.85 billion but still missed analysts' expectations by $100 million. Its adjusted earnings soared 308% to $6.65 per share and easily cleared the consensus forecast by $0.87.
Supermicro is still growing like a weed, but missing Wall Street's lofty revenue estimates caused its stock to stumble 10% during after hours trading. Should investors consider that pullback to be a buying opportunity or a grim warning?
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Supermicro's AI-driven acceleration
Supermicro produces pre-built servers for data centers. It only controls 6.1% of the global server market, according to Barclays, while Dell Technologies leads the market with roughly 17%.
However, Supermicro specializes in high-performance liquid-cooled servers, and its tight partnership with Nvidia grants its access to the chipmaker's top-tier server GPUs before its larger competitors. Those advantages helped it carve out a niche in prebuilt artificial intelligence (AI) servers -- and that market has expanded rapidly over the past few years with the arrival of new generative AI platforms like OpenAI's ChatGPT. It's also been developing new AI servers which use AMD's cheaper data center GPUs instead of Nvidia's supply constrained chips.
Bank of America estimates that Supermicro already controls 10% of the dedicated AI server market, and it believes its share could rise to 17% within the next three years as the entire market expands by 150%. The company already generated roughly half of its revenue from its AI servers at the end of fiscal 2023.
That's why Supermicro's revenue and adjusted EPS surged 37% and 109%, respectively, in fiscal 2023, which ended last June, and why its growth accelerated throughout fiscal 2024.
Supermicro expects to keep growing
Supermicro's third quarter revenue slightly missed analysts' expectations, but it still raised its fiscal 2024 guidance. For the full year, it expects its revenue to rise 106%-112%, compared with its prior outlook for 101%-106% growth and analysts' expectations for 105% growth. It expects its adjusted EPS to increase 97%-104%, which was also significantly higher than the consensus forecast for 85% growth.
CEO Charles Liang said Supermicro expected to "continue gaining market share" in the AI market as it rolled out its new products. That rosy outlook suggests that analysts' expectations for 41% revenue growth and 32% adjusted EPS growth in fiscal 2025, based on the midpoints of its updated guidance, might be too low.
But it could struggle to satisfy the bulls
Based on those expectations and its current price of $772, Supermicro's stock doesn't seem expensive at 25 times next year's earnings and 2 times next year's sales. But it still trades a premium to other server makers: Dell trades at just 17 times forward earnings, while Hewlett Packard Enterprise has a forward multiple of 9.
Therefore, some investors might be worried that Supermicro's recent growth spurt will abruptly end as the AI market cools off. It could also face tougher competition from Dell, HPE, and other larger companies in the nascent AI server market. If that happens, Supermicro's stock could crumble as it's revalued at just another server maker.
Even after its post-earnings pullback, Supermicro's stock has risen 635% over the past 12 months. For that rally to continue, it needs to keep clearing Wall Street's rising expectations. At the same time, many investors are probably looking for reasons to take profits in Supermicro and other highflying AI stocks in this wobbly macro environment.
Is it the right time to buy Supermicro?
Supermicro missed Wall Street's sky-high revenue expectations in the third quarter, but its full-year outlook indicates that its core business is still firing on all cylinders. It has a first mover's advantage in the high-performance AI server market, and its stock looks reasonably valued relative to its long-term growth potential.
If you believe the AI market will continue to expand and Supermicro will consistently grow its share of the booming AI server market, then its recent decline represents a golden buying opportunity. Its stock could remain volatile this year, but it could generate big long-term gains for investors who can tune out the near-term noise.
