Shares of Super Micro Computer (SMCI 7.34%) were rallying on Thursday, up a whopping 7.5% on the day as of 2:35 p.m. ET.
Unlike many other beaten-down stocks that are rallying today, Super Micro had already appreciated mightily in 2023, up a whopping 233% on the year. Still, the stock remains about 25% below its early August highs. So the prospects of lower interest rates and an economic “soft landing” appear to be spurring a “risk on” mentality in cyclical stocks, such as financials, industrials, and, in the case of Super Micro, technology hardware.
In addition, Super Micro issued a press release today highlighting new availability of servers built with the new Intel (INTC 1.36%) fifth-generation Xeon server processor, perhaps incrementally increasing excitement for this AI stock.
Super Micro has become a growth stock that likes lower interest rates
Two years ago, Super Micro computer was known as just a cyclical hardware maker, without much differentiated technology, garnering an exceptionally low multiple.
But over the past two years, Super Micro’s revenue and earnings have accelerated mightily, as the artificial intelligence revolution has awoken investors to the company’s differentiated products. Super Micro’s unique “building block” architecture, which allows for mass customization, as well as its industry-leading energy-efficient designs have found favor among customers in the age of AI.
As such, Super Micro’s P/E multiple has expanded even as its earnings per share have rocketed higher, leading to outsized gains.
SMCI PE Ratio data by YCharts
Of course, a higher multiple makes Super Micro’s stock more sensitive to long-term interest rates, as long-term interest rates will discount future earnings by a greater amount than current earnings. And if short-term rates remain high, that could limit Super Micro’s customers’ ability to invest in AI servers.
That’s why yesterday’s Federal Reserve meeting and subsequent press conference with Fed Chair Jay Powell is propelling Super Micro’s stock higher. At Wednesday’s meeting, the Fed appeared to ease off expectations for more rate increases and even increased the outlook for three rate cuts next year, above Wall Street’s expectations of just two. Furthermore, Powell noted the Fed would not necessitate a recession to begin lowering rates.
Super Micro, despite its sterling business and stock performance this year, appears to be regarded as “risky” by many investors and is likely benefiting from today’s “risk on” sentiment in the wake of yesterday’s meeting.
In addition, Super Micro issued a press release today noting the availability of AI servers containing Intel’s new fifth-generation CPU, formerly codenamed Emerald Rapids. The new chips enable a 36% improvement in performance-per-watt over Intel’s already-popular fourth-gen chips, according to third-party researcher Openfoam. Not only are these servers available with the other popular GPUs, but the new Super Micro servers also incorporate Intel’s Max GPUs, which Intel hopes can challenge the dominant AI GPU leader Nvidia.
One of Super Micro’s competitive advantages is a faster time to market than other server companies, due the agility of its building block architecture. So today’s press release appears to be an example of that.
Super Micro is still reasonably valued
While Super Micro’s 27 P/E multiple appears expensive for a server maker, management expects big-time growth in the year ahead. The company’s recently raised guidance for $10.5 billion in fiscal 2024 revenue equates to about 48% growth over 2023, as the AI revolution continues apace.
Given the apparent large growth opportunity this year and beyond, Super Micro remains one of the top stocks to benefit from the artificial intelligence trend.
Billy Duberstein has positions in Super Micro Computer and has the following options: short January 2025 $110 puts on Super Micro Computer, short January 2025 $125 puts on Super Micro Computer, short January 2025 $130 puts on Super Micro Computer, short January 2025 $280 calls on Super Micro Computer, short January 2025 $380 calls on Super Micro Computer, and short January 2025 $85 puts on Super Micro Computer. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Intel and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
