Shares of Super Micro Computer (SMCI +3.61%) have gone on a roller coaster ride so far this year. The AI server manufacturer's stock racked up gains of more than 300% in less than three months at the beginning of 2024, but it's down 29% since hitting an all-time high in the first half of March.
But now, Supermicro stock seems to be gaining momentum once again as it rose more than 12% on June 13. This surge was driven by the latest earnings reports from major artificial intelligence (AI) players such as Broadcom and Oracle. While Broadcom raised its forecast for AI chip sales for the current fiscal year, Oracle pointed out that it is building more cloud computing capacity to cater to the massive demand it's seeing.
These developments bode well for Supermicro, whose AI servers are used for mounting chips used for training and deploying AI models in data centers. However, the stock's latest surge means it has nearly tripled in 2024 already. So is it too late for investors to buy Supermicro stock? Let's find out.
NASDAQ: SMCI
Key Data Points
Supermicro isn't expensive despite its impressive surge
Supermicro stock is currently trading at 4.3 times sales. That's lower than the U.S. technology sector's average of 7.8, suggesting the stock is undervalued. A big reason Supermicro's price-to-sales ratio is attractive right now is the fact its share price gains have been backed by outstanding growth on the company's top line.
More specifically, Supermicro's fiscal 2024 Q3 revenue tripled year over year to $3.85 billion. Additionally, the company has increased its fiscal 2024 revenue guidance to $14.9 billion from the earlier expectation of $14.5 billion (both figures at the midpoint of their respective ranges). The updated guidance means Supermicro's top line is on track to more than double from the previous fiscal year.
Moreover, the company's solid sales growth is also translating into a healthy improvement in its earnings. Its bottom line grew fourfold in the previous quarter to $6.65 per share. The company currently sports an earnings multiple of 43, a small discount to the U.S. tech sector's average price-to-earnings (P/E) ratio of 45. However, its forward earnings multiple of 21 indicates its bottom-line growth is set to take off.
Another multiple that tells us that Supermicro is attractively valued is its price/earnings-to-growth ratio. The PEG ratio takes into consideration a company's potential earnings growth. As a rule of thumb, a PEG ratio of less than 1 means a stock is undervalued based on the potential growth it is expected to deliver, and that's precisely the case for Supermicro:
Data by YCharts.
That's not surprising as Supermicro's earnings are expected to grow at an annual rate of 62% over the next five years, powered by huge spending on AI servers.
Higher spending on AI infrastructure is going to be a big catalyst
The latest earnings reports from Oracle and Broadcom tell us that AI infrastructure spending is growing at an impressive pace. Oracle, for instance, is "working as quickly as we can to get cloud capacity built out given the enormity of our backlog and pipeline." Broadcom, on the other hand, pointed out that hyperscale cloud computing providers are "accelerating their investments" to improve the performance of their data centers.
This is the reason the AI server market is forecast to grow from a size of $31 billion in 2023 to a whopping $430 billion by 2033. That's a compound annual growth rate (CAGR) of 30%. Supermicro is growing at a faster pace than the AI server market overall, suggesting it is the company of choice for data center operators to deploy AI servers.
Supermicro's strategy of quickly churning out cost-efficient server solutions for popular AI chips from leading chipmakers seems to be playing a key role in helping it gain a bigger share of the AI server market. Moreover, the company's focus on quickly adding more production capacity is also allowing it to make a bigger dent in this space.
All this indicates shares of Supermicro could continue heading higher in the long run. The AI stock carries a median 12-month price target of $1,030 per share among 20 analysts covering it, which represents a 22% gain from current levels.
Investors who haven't bought this high-flying stock yet should still consider doing so -- it isn't too late.
