The pace of artificial intelligence (AI) adoption has only accelerated over the past year and has shuffled the ranks of some of the world's largest companies, with several household names vying for bragging rights. Microsoft currently leads the pack, having unseated Apple, each with a market cap of roughly $3.4 trillion. Nvidia's rise through the ranks has been breathtaking to behold, having nearly tripled over the past year to take the third spot at $3 trillion. Several other major purveyors of AI, namely Alphabet, Amazon, and Meta Platforms, boast valuations of between $1.3 trillion and $2.3 trillion.
With a market cap of just $49 billion (as of this writing), it might seem like sacrilege to propose that Super Micro Computer (SMCI 0.03%), also called Supermicro, might be headed for the $1 trillion club. However, the accelerating adoption of AI has increased the need for servers capable of running and training AI systems, and the company's long track record of success makes Supermicro a clear candidate for inclusion in this elite fraternity.
Image source: Getty Images.
Flexible server options
While Supermicro has made a splash in recent years, investors might be surprised to learn the company has been creating customized servers for more than three decades. The accelerating adoption of generative AI shone a spotlight on the under-the-radar server maker, bringing it out of the shadows.
Supermicro's claim to fame is the company's highly customizable building-block architecture, which helps the company provide server solutions for customers of all sizes and shapes. Furthermore, Supermicro's long focus on energy efficiency has taken on greater significance as cost becomes a factor. It also offers a variety of free-air, liquid-cooling, and traditional air-cooling technologies, giving each customer just what they're looking for.
The company has partnerships with all the leading chipmakers, giving it access to the most in-demand AI processors. This includes strong working relationships with Nvidia, Advanced Micro Devices, and Intel, among others.
This approach has served the company well. For its fiscal 2024 third quarter (ended March 31), Supermicro's revenue surged 200% year over year to $3.85 billion, while its earnings per share (EPS) of $6.65 jumped 308%. Management is guiding that its triple-digit growth will continue, raising its full-year guidance to revenue of $14.9 billion and adjusted EPS of $23.69, which would represent growth of 109% and 100%, respectively.
Management reports that Supermicro is growing at nearly 20 times the industry average, which clearly shows the company is taking market share from the competition. Analysts at Bank of America agree, suggesting Supermicro will increase its market share from 10% last year to 17% by 2026.
NASDAQ: SMCI
Key Data Points
The path to $1 trillion
Supermicro is one of the premier names in the AI server market. The company's agility has been paramount in taking share from its rivals, as its building-block server architecture means it has something for everyone. Supermicro has also established critical partnerships with the chipmakers that supply the company with the most requested processors, giving it ample supply to meet the accelerating demand.
Despite those advantages, it will still be some time before Supermicro ascends the ranks to become a trillionaire. According to Wall Street, Supermicro is poised to generate revenue of $14.9 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 3.3. Assuming its P/S remains constant, Supermicro would have to grow its revenue to about $305 billion annually to support a $1 trillion market cap.
It's important to put this in context: The company is ramping up its production capabilities just to be able to generate sales of $25 billion annually, so a nearly 20-fold increase in revenue is still off in the distant future.
If the company were able to keep up its triple-digit year-over-year growth rate, Supermicro could reach the $1 trillion market cap by 2029. However, keeping up that frantic pace of growth for five years would be unparalleled for a well-established company. Yet, even if we cut its growth rate in half, Supermicro could hypothetically reach a $1 trillion market cap by 2032.
While that might sound far-fetched, the evidence suggests it's more likely than you might think. BofA analyst Ruplu Bhattacharya posited the AI data center market will grow at a compound annual growth rate (CAGR) of 50% over the coming three years, and by taking share from its rivals, Supermicro's revenue could "grow even faster."
He's not the only one who thinks the data center upgrade cycle is about to take off. Nvidia CEO Jensen Huang believes the installed base of data centers will double to $2 trillion over the next four to five years to support the accelerating adoption of AI.
So if Supermicro is successful in capturing even a small part of that fast-growing market, the path to the $1 trillion club will be paved with profits.
