Shares of Super Micro Computer (SMCI 4.42%), a provider of high-performance server solutions for the artificial intelligence (AI) industry, were up by around 5% as of 1:30 p.m. ET on Monday after Northland Capital Markets analyst Nehal Chokshi raised his price target on Supermicro stock by nearly 50%.
What Chokshi said
To be precise, Chokshi raised his price target on Supermicro stock (which was already rated outperform, and which Northland calls a “top pick” in AI) to $925 per share. The analyst observed that since Northland first recommended buying Supermicro in November, the stock has roughly tripled in price despite earnings estimates rising only about 42%. They are now forecast to hit $27 per share in 2025.
For many investors, the discrepancy between forecast earnings growth and the price of the stock might be taken as a warning sign — but not for Chokshi.
Quoted on StreetInsider.com Monday morning, Chokshi argues that what’s more significant than the actual price tag is the earnings multiple that investors seem willing to pay for Supermicro stock. This multiple has already more than doubled to 27 times projected 2025 earnings. Chokshi ascribes this change to “investors’ recognition that Supermicro is a leader in providing Gen AI rack scale servers,” as well as the company having “durable” intellectual property that will make it a “high growth name.”
In this regard, Chokshi points out that “SMCI’s ROIC has increased from an ~15% level from FY14 to FY21 to 18% in FY22 to 37% in FY23 (Jun Q end).”
Is Supermicro stock a buy?
Not to overemphasize the point or anything, but if the company’s return on invested capital has more than doubled over the last decade, then maybe it only makes sense that its multiple to earnings should double as well.
All that being said, in Super Micro Computer, we’re still looking at a stock that costs more than 56 times its $732 million in trailing earnings, and the company currently has negative free cash flow, having burned nearly $170 million over the last 12 months. Don’t get me wrong. Growth is great and all. But I’d still be cautious about investing in this stock until the company shows it can generate strong positive free cash flow — and keep doing so consistently.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
