Super Micro Computer (SMCI 2.11%) has been one of the hottest stocks on the market in 2024, as shares of the server manufacturer have already more than doubled this year thanks to an impressive set of results that points toward a massive acceleration in its growth. What’s more, Supermicro stock has shot up a whopping 6,900% since it went public back in August 2007, outpacing the S&P 500 index’s jump of 249% by a huge margin.
The massive gains that the company has clocked over the past 17 years have brought its stock price to more than $615. That’s way higher than Supermicro’s initial public offering (IPO) price of $8 per share. Will this encourage Supermicro’s management to execute a stock split and lower the share price?
Why companies undertake stock splits
A stock split doesn’t affect the stock owner’s share of the company, it just divides that share into bigger or smaller pieces. It also does nothing to alter the fundamentals of the company that is splitting the shares. For example, if you hold two shares of company X with each being priced at $10, the total value of your holdings stands at $20. If company X decides to execute a 2-for-1 forward stock split, you will now own four shares following the split and each share will be priced at $5. So, the total value of your holdings in company X will remain at $20. The company’s value remains constant throughout, only the number of shares changes.
Stock splits have become popular in recent years with several high-profile companies going down this route for various reasons. For instance, when Nvidia announced a 4-for-one forward stock split nearly three years ago, the press release said that the move was made “to make stock ownership more accessible to investors and employees.” Tesla management also said something similar in August 2022 when the company announced a 3-for-1 stock split.
Some investors and analysts believe that stock splits can increase the demand for a company’s shares by lowering the price and attracting more retail investors who may not have been able to invest earlier because of a high stock price. This, in turn, could have a positive effect on a company’s stock price as more people start buying the stock once the price falls following a split. The need for stock splits has fallen in recent years though as many brokers now allow investors to buy fractional shares of a company, which makes a stock split unnecessary on an affordability basis.
The reduced necessity of stock splits bolsters the argument that investors should focus less on stock splits and more on a company’s fundamentals and prospects. It’s those factors that will be more helpful in understanding where a stock could be headed in the long run.
In light of that reasoning, let’s look at the reasons why Supermicro has been a terrific investment over the years and check if it could continue to head higher in the long run irrespective of any potential stock split.
Supermicro’s terrific growth is here to stay
Super Micro Computer’s revenue and earnings grew at a terrific pace over the past decade, as is evident from the chart below.
SMCI Revenue (TTM) data by YCharts
Supermicro finished fiscal 2014 with revenue of $1.47 billion. It is on track to end the ongoing fiscal 2024 with $14.5 billion in revenue as per the midpoint of its guidance range. That translates into a compound annual growth rate (CAGR) of almost 26%. What’s more, Supermicro’s earnings have increased at a CAGR of 65% in the past five years.
This impressive growth can be attributed to the secular growth of the server market in the past decade, which has created solid demand for the company’s modular server and storage solutions. According to a third-party estimate, server spending reportedly increased from $55 billion in 2014 to almost $74 billion in 2020.
Super Micro’s revenue has grown at a faster pace than the server market over the past few years. For instance, the company’s fiscal 2014 revenue of $1.47 billion indicates it controlled less than 3% of this market at that time. Super Micro’s fiscal 2024 revenue guidance and the server market’s revenue estimate of $88 billion for this year indicate that its market share is on track to increase to more than 16%.
By 2029, the global server market is expected to generate almost $130 billion in revenue, according to Mordor Intelligence. There is a good chance that Supermicro could continue to increase its share of the global server market as its artificial intelligence (AI)-specific solutions are in hot demand. This is evident from the fact that the company’s revenue is on track to more than double this year.
Even better, Supermicro is working to add more production sites and believes that it could eventually boost its revenue generation capacity to more than $25 billion annually. All this illustrates why analysts anticipate the company’s earnings will increase at a CAGR of 48% for the next five years.
With the stock trading at 27 times forward earnings right now, which is lower than the Nasdaq-100‘s forward earnings multiple of almost 30, buying Supermicro looks like a no-brainer considering the impressive growth that it is set to deliver irrespective of a stock split.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Tesla. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
