There is no hotter area to invest in today than artificial intelligence, or AI as it is commonly known, and there is no hotter stock to buy than Super Micro Computer (SMCI:NASDAQ). But should you?
In 2024 to date the shares are up 219.1%, notwithstanding a recent wobble, leaving the market cap topping $50 billion. That’s after clocking up 246% returns in 2023. Put another way, on 30 December 2022, the shares could be bought for $82.10. Today, you’d have to pay $910.97 to buy the stock.
Even other rampant assets, like Nvidia (NVDA:NASDAQ), gold or Bitcoin, can’t match that.
Ever since OpenAI’s ChatGPT took the world by storm in late 2022, investors have been racing to find winners from this explosive trend. According to Next Move Strategic Consulting, the AI market could grow to be worth nearly $2 trillion by 2030, and even based on Statista’s more measured projection, it implies more than 17% compound growth a year through the rest of the decade.
This year has already seen umpteen technology stocks skyrocket as investors bet big on the emerging promise of AI to seed a new era of growth, efficiency, and profits. In 2024 to date, the Nasdaq 100 index has rallied more than 10%, versus 6% for the Vanguard FTSE All-World (VWRP) ETF.
While tech industry titans like Nvidia, Meta Platforms (META:NASDAQ) and Microsoft (MSFT:NASDAQ) – up 91%, 44% and 12% respectively this year – have become the obvious choices to bet on AI growth, an increasingly number
of UK investors are joining Wall Street professionals in backing Super Micro Computer’s AI potential.
WHAT DOES SUPER MICRO COMPUTER DO?
As the world hurtles into a new technological era led by AI and machine learning, many tech companies are raising the stakes in the game. Super Micro is renowned for its energy-efficient servers with innovative features, such as liquid cooling, building-block architecture, and storage solutions.
The San Jose, California company’s innovative hardware includes high-density servers and specialised hardware accelerators. These are effectively processor-packed industrial super computers with the capacity to rapidly speed up certain functions on demand.
These processing power-packed tools are perfect for our emerging world of cloud and edge computing, 5G/6G networks, Internet of Things super connectivity, autonomous driving, and AI servers.
Super Micro has key partnerships with leading chip designers like Nvidia, Advanced Micro Devices (AMD:NASDAQ) and Intel (INTC:NASDAQ), and supplies clients like US electronics automation firm Synopsis (SNPS:NASDAQ) and Swedish/Swiss automation multinational ABB (ABBN:SWX), France’s Orange (ORA:EPA) mobile network, and New York-listed Brazilian state oil company Petrobras (PBR:NYSE) in locations all over the world.
What this means is that AI is lighting a fire under Super Micro’s financial performance. Between its 2019 financial year (to 30 June) and the 2023 financial year, Super Micro’s revenue has grown from $3.5 billion to $7.1 billion, while earnings have increased from $1.39 to $11.43 per share. Even in the company’s most recent second quarter of fiscal 2024, the results were impressive, smashing consensus expectations for earnings of $4.51 on $2.8 billion revenue with $5.59 on $3.66 billion respectively.
Due to its rapid global expansion and high demand, the company recently announced that it can now deliver 5,000 liquid-cooled racks per month, up from its initial target of 4,000. At its current utilisation rate of about 60% from its US headquarters and Taiwan facility, the company now expects to easily generate $14.3 to $14.7 billion in annual revenue this year, up from previous $10 billion to $11 billion guidance.
Additionally, the company opened a low-cost manufacturing facility in Malaysia last year, which it believes will result in a better cost structure and higher volume.
MANUFACTURING EFFICIENCY = FATTER MARGINS
This showing up in far better operating margins. In 2020, these were just 2.57%, and even allowing for the Covid impact, 2019’s were only a little better at 2.78%. Compare that to last year’s 10.7%, up from 6.45% in 2022. Second quarter 2024 operating margins were 11.3%, suggesting there remain further margin gains to be had.
Management is confident of clocking more than $20 billion revenues in fiscal 2025. Analyst consensus, according to Stockopedia, calls for $20.2 billion revenue next year on which roughly $1.84 billion net profits are likely, implying earnings per share of $30.
Super Micro is not as prominent as some server industry giants, a market dominated by the likes of Hewlett Packard Enterprise (HPE:NYSE), Dell Technologies (DELL:NYSE), IBM (IBM:NYSE), Cisco Systems (CSCO:NYSE) and Lenovo (LNVGY:OTCMKTS), its focus on niche markets and specialisation in AI hardware infrastructure position it for a bright future.
Considering the stock’s astonishing rise, Super Micro shares are no longer what you might call cheap. Based on fiscal 2025 estimates, the current price to earnings multiple is just a little shy of 40, about twice that of the S&P 500 right now. Yet the company is clearly growing far faster than the high-single digits of the average US company so should command a premium.
Certainly, the analyst community remains very supportive, with nine of the 17 analysts covering the stock slapping buy ratings on the shares (plus two overweights), five holds and just the single sell, based on MarketWatch information.
HARD INVESTMENT CASE TO MAKE
Yet there appears to be little reason to chase the stock right now, based on price target information. The consensus average stands at $745, implying significant scope to fall over the coming weeks and months, especially if there is any performance weakness. Even the top target of $1,300 implies only a modest 12% upside.
Based on its fiscal 2025 growth estimates and AI-driven opportunities in the coming years, Super Micro’s valuation seems not unreasonable, if a little top-heavy right now. Yes, there is massive growth projected for AI servers, and Super Micro looks poised to be among the emerging leaders in the space.
An awful lot of growth is already priced in, tilting the risk/reward balance a little too far towards the former for many investors, we suspect. Perhaps the sensible approach would be to examine the portfolios of any tech-based funds you already own to see if you already hold exposure to Super Micro – if so, that may be enough for now.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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