The years-long uptrend in artificial intelligence (AI) stocks may be taking a break, but AI integration isn't slowing down. There's still a ton of work to be done before tech companies and the cloud computing players that support them will have enough AI computing capacity in service to meet the market's needs, and plenty of companies are well positioned to benefit from the infrastructure spending to come.
One company that's in a strong position is Super Micro Computer (SMCI 0.48%). It's a key provider of the servers that bring together graphics processing units (GPUs) and other AI accelerator devices with other hardware into the functioning machines that provide computing power to clients. However, the stock was beaten down due to some allegations that the company has since debunked, and it hasn't fully recovered. As such, Supermicro (as the company often refers to itself) offers investors a one-two punch of value and growth.
Super Micro Computer has a key technology that its competitors don't
When you hear about companies filling data centers with thousands of computing devices, they aren't just haphazardly throwing these devices into a room, connecting them, and calling it a day. They need to be properly connected and cooled; otherwise, they won't run at their full potential and could overheat, causing premature failure. That's why server racks like those from Supermicro are an important piece of the tech puzzle.
NASDAQ: SMCI
Key Data Points
While the server space is fairly commoditized, Supermicro's direct liquid-cooling (DLC) technology gives it an edge over its competitors, and is one reason why its products have been the preferred racks for mounting Nvidia's cutting-edge GPUs. Because water has a much higher heat capacity than air, it can absorb much more heat, giving Supericro's DLC technology a 40% advantage in energy savings. Additionally, because a server room containing liquid-cooled servers doesn't need as much airflow, a data center can house those servers in a space 20% of the size that air-cooled servers would need. This makes it cheaper to construct data centers.
Based solely on this information, you might expect that Supermicro stock would be performing like an all-star player in AI, but it's not.
In mid-2024, short-selling firm Hindenburg Research published a short report on Supermicro that accused it, among other things, of accounting fraud. Some drama ensued. Supermicro's auditor, EY, resigned, and the Department of Justice opened a probe, but after all that, a third-party auditing committee investigated the company and found no wrongdoing. Additionally, it brought on respected accounting firm BDO (another giant in the field) to be its new auditor.
However, it can take a while for the stock market to forget allegations like those brought by Hindenburg, so the stock's shadowed reputation on Wall Street has lingered. That gives individual investors the chance to potentially get this stock at a bargain price, as it's still valued cheaply relative to the company's rate of growth.
Supermicro's in the bargain bin
Super Micro Computer is expected to grow significantly over the next few years. Whenever you hear bold predictions about how much AI spending is on track to grow, you can pencil in an assumption that Supermicro will receive a chunk of that growing spending. Because it looks to have so much growth ahead of it, the forward price-to-earnings (P/E) ratio is the best metric by which to value the stock.
SMCI PE Ratio (Forward) data by YCharts.
Trading at just 13 times forward earnings, Supermicro is dirt cheap compared to the broader market. For reference, the S&P 500 (^GSPC 0.61%) trades for 21.1 times forward earnings.
With the stock starting at such a low point and Wall Street analysts projecting 60% growth in its current fiscal year and 40% growth in its next one, it's safe to say that Supermicro has a ton of potential. Because of that, I wouldn't be surprised if it's one of the best-performing AI stocks moving forward.
