The boom in artificial intelligence (AI) may be hitting its next leg. Microsoft just reported accelerated cloud computing growth due to AI, while OpenAI's ChatGPT is gaining hundreds of millions of users around the globe. One stock benefiting from this recovery is Super Micro Computer (SMCI 1.10%). The data center assembler is up around 20% in the last month and just got an upgrade from a Wall Street analyst.
Should you buy Super Micro Computer stock to for the next leg up in AI?
NASDAQ: SMCI
Key Data Points
Riding the AI revolution
In the last five years, Super Micro Computer's revenue is up over 500%. This is due to the growing spending on data center solutions from AI infrastructure providers like Microsoft. Super Micro Computer is an expert in assembling data centers with advanced computer chips from the likes of Nvidia, where Super Micro Computer spends a lot of money.
Companies like Microsoft will go to Super Micro Computer for efficient outsourcing of AI data center assembly as they try to build out more computing resources as fast as possible to keep up with demand. Management is currently guiding for $21.8 billion to $22.6 billion in revenue this fiscal year (ending in June), which is a slight decline from its previous guidance but would still represent solid growth from $15 billion in revenue last fiscal year.
As demand seems to be picking up for AI infrastructure again, Super Micro Computer is seeing its stock rocket higher. However, it is still down 67% from all-time highs and currently sports a market cap of $23 billion.
Image source: Getty Images. Super Micro Computer is a beneficiary of AI.
Slim margins and cyclicality
Super Micro Computer is simply a middleman for computer chips and data centers. Nvidia has a 62% operating margin. Amazon Web Services (AWS) has a 37.5% operating margin. Last quarter, Super Micro Computer had a gross margin under 10%.
What does this mean? Super Micro Computer is able to sell its products at only a slight premium to its input costs, which gives it extremely slim profit margins compared to its suppliers and customers. Nvidia and the AI cloud infrastructure companies hold a lot of power in the relationship. Last quarter, Super Micro Computer had a slim operating margin of just 3.2%.
This could pose trouble in a cyclical downturn, which will eventually come for the AI market. This is the ideal operating environment for Super Micro Computer -- you couldn't ask for more demand from customers -- yet it still is barely generating a profit.
SMCI PE Ratio (Forward) data by YCharts.
Is Super Micro Computer stock a buy?
Things are going well for Super Micro Computer right now. Its stock is up over 1,000% in the last five years, even including its recent drawdown. The stock still looks cheap, with a market cap of $23.2 billion and a forward price-to-earnings ratio of 19. If demand for AI data center assembly keeps growing, the stock will likely be higher in a few years.
I still don't think it is a good buy for a long-term portfolio. A cyclical downturn will eventually arrive in data center spending, which will almost assuredly lead to declining profit margins for Super Micro Computer. Given its already razor-thin profit margins with demand for its products and services at a fever pitch, it is likely to lose money when the cycle inevitably flips. This may not happen for a year or five, but it will happen eventually.
Super Micro Computer has thin margins because it does not provide the most value for the AI sector. This comes from Nvidia's innovative computer chips, which it can sell at a premium price, and the cloud infrastructure providers selling computing power to software companies. Super Micro Computer does have a lot of revenue right now, but it is simply a middleman packaging computer chips together. It has practically zero competitive edge.
Even though Super Micro Computer is growing fast today and looks to be trading at a cheap price, investors would be smart to avoid buying shares. This is a cyclical company with no long-term competitive advantage in its industry.
