Super Micro Computer (SMCI 33.18%) has become one of the more dramatic and surprising companies in the stock market over the past year. The company existed for decades in obscurity, and its stock gained little traction for years after its 2007 initial public offering (IPO).
However, a key partnership with Nvidia has changed the game for Supermicro (as the company is commonly called). Consequently, its stock is up 190% in the first half of this year. With its massive gains, investors are right to ask whether that momentum can continue through the second half of 2024.
NASDAQ: SMCI
Key Data Points
The state of Supermicro
Supermicro is a technology hardware company known for producing energy-saving, environmentally friendly tech products for the cloud, metaverse, and other applications. Its servers have gained the most attention, particularly those equipped with Nvidia's artificial intelligence (AI) chips. Thanks to this partnership, its profits and stock price have grown exponentially.
As recently as four years ago, its stock traded for about $24 per share. This year, its recent growth has been so dramatic that analysts predict nearly $24 per share for Supermicro's net income! Not surprisingly, such improvements have led to a 3,400% gain in the tech stock's price since 2020.
A Market.us study seems to confirm this trend. It predicts that the AI server industry will expand at a compound annual growth rate (CAGR) of 30% through 2033, transforming what was a $31 billion industry last year into one worth $430 billion by 2033.
Can the growth continue?
Even the most dedicated Supermicro bulls should not expect another 3,400% gain over the next four-and-a-half years. While an additional 190% gain in six months is far from guaranteed, that move is not out of the question when one looks at the financials. In the nine months of fiscal 2024 (ended March 31), its net sales of $9.6 billion rose 95% from year-ago levels. Its cost of sales grew at a slightly faster 102%.
Consequently, its net income of $855 million grew 92% over the same period. Also, with consensus estimates pointing to a 102% increase in net income for the fiscal year, its earnings are rising fast enough for the stock to maintain a rapid growth pace.
Additionally, despite surging profits and massive stock price growth, its price-to-earnings (P/E) ratio is 47 and its forward P/E ratio is 36. This is less than some of the faster-growing tech stalwarts such as Nvidia and Amazon, indicating it could sustain the multiple expansions needed to take the stock price much higher, possibly enough to maintain the current growth pace for another six months.
Supermicro in the second half of 2024
Given its business and financial conditions, a 190% gain for the second half of this year is a plausible scenario. Admittedly, the market makes no guarantees, and ultimately, investors should not expect a 190% move higher by the end of 2024.
However, demand for the company's servers is likely to continue rising, possibly enough to sustain near triple-digit revenue and profit growth for the foreseeable future.
At its current valuation, a 190% increase in the stock price would give it an expensive, but not record-breaking P/E ratio. Hence, even if it falls short of that ambitious goal, Supermicro could still deliver significant returns for the rest of the year.
