Dan Ives is an equity research analyst at Wedbush Securities. He covers the biggest names in the technology sector, and always seems to have a bead on the latest megatrend.
Right now, artificial intelligence (AI) is the biggest headline-grabber in tech. But one area of AI that could be overlooked is information technology (IT) infrastructure. What does that even mean?
Here's how infrastructure fits into the AI narrative, and why Super Micro Computer (SMCI +0.26%) is my top pick to play the trend.
NASDAQ: SMCI
Key Data Points
IT infrastructure is a huge opportunity
Developing AI requires some sophisticated protocols across hardware and software. One of the most important pieces to this puzzle are chipsets known as graphics processing units (GPUs).
Nvidia and Advanced Micro Devices are two leading GPU developers at the moment, but other big tech stalwarts including Microsoft, Amazon, and Meta Platforms are looking to get in on the action.
Investing into these types of products falls under an accounting category called capital expenditures (capex). During a recent interview on CNBC, Ives suggested that AI capex will be a $1 trillion market during the next three years.
So with that said, why do I think Supermicro is a hidden gem?
Image source: Getty Images.
Why Supermicro could benefit
Selling GPUs and accompanying software is only part of the equation. These important AI-powered products are housed in huge data centers. Within these data centers sit enormous storage racks that hold GPUs in very specific architecture designs. This is where Supermicro comes into play.
Supermicro is an IT architecture specialist that designs how GPUs fit in storage clusters. The company works closely with both Nvidia and AMD, and I see a couple of obvious catalysts on the horizon.
Specifically, sales of Nvidia's new Blackwell series GPUs are projected to reach the multibillion-dollar mark by the end of the year, according to management and Wall Street analysts. I surmise Supermicro will be heavily involved in the specifics pertaining to how these new products will optimally be housed in data centers, and see Blackwell as an important tailwind for the company.
Furthermore, I would not be surprised to see Supermicro broaden its reach in the IT infrastructure landscape as others in big tech start releasing their own chips. To me, rising capex is an obvious catalyst that could power Supermicro's business for years to come.
With all of this said, there are some important things to consider before pouring into Supermicro stock.
An attractive valuation, but be careful
Although Supermicro's price-to-earnings (P/E) multiple has been coming down throughout 2024, the graph below illustrates some notable decline during the past couple of months.
SMCI PE Ratio data by YCharts
There are two big forces that have led to a sell-off in Supermicro stock. First, the company's earnings report from early August showed how volatile Supermicro's gross margin can be. Ideally, growth investors want accelerating revenue, expanding margins, and rising profits. Supermicro's business is not that straightforward.
Infrastructure businesses are going to carry lower-margin profiles than software businesses or companies with pricing power. Candidly, I think investors were simply hit with a reality check and need to accept that Supermicro's profit margin may ebb and flow from time to time.
The other factor at play here is that Supermicro found itself the subject of a report published by short-seller Hindenburg Research in late August. While short reports are often perceived as a negative, there's one important caveat to point out: short-sellers have a vested interest in seeing a share price fall.
Although Supermicro did delay the filing of its annual report after Hindenburg's report claimed the company manipulated its accounting, not much else has come from the short report besides speculation and a cratering stock.
I will concede that investing in Supermicro carries some risk at the moment. But thinking longer-term, I see increased investments in capex and IT infrastructure as a secular tailwind that could fuel Supermicro's business for the long run.
For these reasons, I see Supermicro as the best positioned company to benefit from opportunities in AI IT infrastructure.
