With shares up by over 4,100% in the last five years, Super Micro Computer (SMCI +2.56%) is one of the few tech stocks that has trounced Nvidia -- the current leader in AI hardware. It likely outperformed because of its smaller size and historically lower valuation.
But with its market cap of $47 billion, Super Micro is no longer a small, undiscovered tech stock. Let's dig deeper to find out if it can still maintain market-beating growth over the next half-decade.
Super Micro's role in the AI ecosystem
Interest in generative AI software exploded after the launch of OpenAI's ChatGPT in late 2022. However, from an investor perspective, the biggest winners have been the infrastructure companies supplying the hardware that makes training and running large language models (LLMs) possible.
Unlike Nvidia, Supermicro is not a chipmaker. Instead, it turns the chips designed by other companies into ready-to-use computer systems and servers. This niche allows it to benefit tremendously from the soaring demand for Nvidia's AI-capable graphics processing units (GPUs). The impacts of this boom are evident in its fiscal third-quarter earnings.
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Net sales jumped 200% year over year to $3.85 billion based on demand for plug-and-play AI servers for data center clients. Management expects to continue gaining market share by creating new server designs. Part of Supermicro's edge comes from its focus on energy efficiency. This can lead to cost savings for clients, which is becoming increasingly important due to the sheer volume of energy required for AI workloads.
What will the next five years have in store?
While Supermicro's niche has allowed it to perform spectacularly well over the previous five years, the next half-decade might be more difficult. Right now, the company seems to be piggybacking off the innovations of Nvidia and other AI GPU makers more than its own. And this might make it more vulnerable to competition in the data center server market.
Rivals like Dell and Hewlett-Packard Enterprise fulfill a similar role of turning AI GPU chips into ready-to-use data center servers. Over the next five years, these companies could pressure Supermicro's economic moat, which would hurt its growth potential and margins.
In the third quarter, Supermicro's gross margin (sales minus cost of goods sold as a percentage) fell from 17.6% to 15.4%. This trend suggests the company's pricing power is declining, and it might be relying on reducing prices to support its expansion. For comparison, Nvidia's gross margin increased from 43.5% to 70.1% in its most recent quarter because it is much harder for clients to replace its products.
Is Super Micro Computer stock a buy?
Supermicro has become a Wall Street darling by serving as a middleman between AI chipmakers and their data center clients. This role has allowed it to benefit from the soaring demand for Nvidia GPUs, and this business probably won't go away anytime soon. That said, investors should expect margins to continue declining as competition rises.
The good news is that with a forward price-to-earnings (P/E) multiple of just 22, Supermicro's shares are significantly cheaper than Nvidia, which has a forward P/E of 46. The market seems to be pricing in Supermicro's potential challenges, so it remains a relatively affordable way to bet on the long-term AI opportunity despite its recent rally.
