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Investment Thesis
Investors are in awe of Super Micro’s (NASDAQ:SMCI) performance on Friday, January 19, 2024 as the company saw its stock price jump 35%. However, even with this spike in the stock price, it’s not too late to get in on the SMCI hype train. Super Micro’s strong foothold in the AI-driven server market, strategic partnerships with companies like Nvidia (NVDA), and impressive financial performance put the company in an ideal position to profit off of the AI boom. Market volatility and customer dependency do pose potential threats to the company’s future, but Super Micro’s ability to innovate and remain competitive in a rapidly changing sector makes it an undervalued yet promising investment.
Introduction
As AI continues to hold its status as a moneymaker in the market, there is no better time than now to invest in Super Micro Computer, Inc. More commonly known as Super Micro, this San Jose-based tech company is a global leader in the design and production of server solutions. The company offers high-performance and high-efficiency server technology that caters to a wide range of markets. These include data centers, cloud computing, high performance computing, IT, and big data. SMCI’s main goals relate to performance maximization and energy efficiency which is evident through their servers, motherboards, and other accessories. The company’s commitment to technological excellence and advancement has propelled it to the top of the server and data center industry, working closely with tech giants like Nvidia and Samsung. With a drive to innovate and over 50% of its revenue coming from AI-related servers, SMCI is in a great position to handle the demands of modern AI applications now and far into the future.
Financial Outlook
Financially, Super Micro has already blown the roof off its expected financial results for the first quarter of fiscal year 2024. The company recently raised its sales and earnings guidance by a significant margin, boosting my already strong bullish stance. Sales are now expected to be between $3.6 billion and $3.65 billion, an impressive jump up from its prior guidance of $2.7 billion to $2.9 billion. Moreover, SMCI has adjusted its predicted earnings per share up from $4.40-$4.88 to $5.40-$5.55. Super Micro justified these revisions, citing “a strong market and end customer demand for our rack-scale, AI and total IT solutions.”
Super Micro management, spearheaded by CEO Charles Liang, are showing extreme confidence in the upward mobility of their company as they’ve revised fiscal 2024 outlook to $10B-$11B in revenue. Some might call this wishful thinking but their balance sheet reinforces an aura of financial health and stability. Their debt level is a manageable $146 million as of September 30, 2023 and they hold $543 million in cash and cash equivalents. SMCI’s efficient operational management is also highlighted in their healthy cash flow from operations, which was $271 million.
This upward revision in sales, earnings, and revenue is fascinating and appealing to investors, myself included. But I also feel this story of unprecedented growth paints a bigger picture with regards to the market’s expectations of the emerging AI sector. Robust growth and increased demand are the simple answers to Super Micro’s success but for investors looking into the future they see the unbounded potential of AI, and recognize the need to enter this space. Super Micro is the safe entry point.
But you don’t just have to take my word for it. The price-to-sales (P/S) ratio of SMCI stands at an attractive 2.5, suggesting major growth potential when compared to tech giants like Microsoft (MSFT) or Nvidia. Additionally, Super Micro’s price/earnings-to-growth (PEG) ratio of 0.94 illustrates how the stock is undervalued, making it an attractive buy.
Strategic Market Positioning
Super Micro’s stock already soared 300% over the past year and even surged an additional 35% this Friday. Despite this impressive growth, I believe it’s not too late to invest. SMCI’s customer base spans over 100 countries and they currently control over 6 million square feet of global manufacturing space. This worldwide presence, coupled with a growing demand for AI-optimized hardware, puts the company in an excellent position to grow in a market forecasted by Grand View Research to reach $437 billion by 2030.
SMCI brings in more than fifty percent of its revenue through AI optimized platforms. It’s this deep connection to AI, a rapidly expanding sector, that has lifted up Super Micro over the past year and all indications point to this trend continuing. The need for servers where hardware and software work together seamlessly is the highest it’s ever been due to AI’s proliferation, and Super Micro does this better than essentially any other company.
Speaking of other companies, Super Micro’s main competitors in the server solutions space – IBM (IBM), Dell (DELL), and Hewlett Packard (HPE) – do not possess the same level of specialization and dominance in the AI sector as Super Micro. Super Micro derives the majority of its revenue from AI hardware, while its competitors have placed more emphasis in areas such as software and personal computing. I can see the positives in this diversification, but if I as an investor want to tap into the rapidly evolving AI hardware market, I want to invest in a company who makes this their top priority. Super Micro’s targeted approach in this niche not only sets it apart but also gives it a competitive edge, allowing the company to adapt quickly to technological advancements and market demands in AI.
Moreover, one of Super Micro’s primary customers is Nvidia, the premiere player in AI chip technology. This close partnership in AI servers enhances Super Micro’s market presence as the company often piggybacks off of Nvidia’s success. Nvidia is set to roll out new and improved AI chips this year, like the H200 AI GPU and the GH200 Grace Hopper Superchip. SMCI’s ability to release updated products optimized for these new chips places the company in the perfect position to be the backbone of AI infrastructure.
Furthermore, Super Micro is opening a new Taiwan facility and its Malaysia campus is going on line in the third fiscal quarter of 2024. This will drastically increase the company’s production capacity in the Asia-Pacific region, an area that is vital for the production and manufacturing of AI-related products. All in all, SMCI’s strategic focus on AI, close ties with Nvidia, and plans to expand capacity reinforce my buy thesis. Super Micro is in the ideal position to ride the coattails of the AI boom.
Valuation
Even with Super Micro’s spectacular performance over the past year, the company’s financial metrics point to undervaluation. Super Micro’s FWD P/E ratio (24.58) sits closely below the sector median (25.09), a fact that strengthens my bullish stance. Ultimately this seems to suggest that the market is modestly underestimating Super Micro’s future earnings potential. If this is the case then future gains could lead to highly profitable payouts for investors who purchase stock while the company is still undervalued.
Moreover, Super Micro’s FWD P/E is also noticeably higher than its peers: Dell’s is 12.57, HPE’s is 8.17, and IBM’s is 17.54. These figures seem to imply that the market has higher expectations for Super Micro’s future earnings growth relative to these companies. It seems like the market expects slower growth from these companies compared to Super Micro, a sentiment that I wholeheartedly agree with.
On a similar note, the company’s FWD P/B ratio of 8.39 – which compares the stock price to book value per share – is significantly higher than the sector median of 4.27. The market appears allured by the value of Super Micro’s assets and the company’s efficient utilization of these assets. This reasonably indicates that SMCI’s growth expectations are still extremely high even after the major upticks of the past week.
Among its peers, Super Micro’s FWD P/B ratio is the highest. For example, IBM, another major player in the server space, only has a FWD P/B ratio of 6.05. Again this suggests an astounding optimism in the market about the future performance of Super Micro’s assets compared to their competitors.
All in all, I feel these metrics point towards one key conclusion: there is no better time than now to invest in Super Micro. This is a company at the center of the tech sector whose growth prospects and financial performance aren’t being fully considered in its market valuation.
Potential Risks
Despite Super Micro’s promising financial metrics and strategic market positioning, there are inherent risks in this investment. The company relies on AI-related servers for over 50% of its revenue which is a positive when AI is doing well. However, if technological disruptions or unforeseen market changes occur in the AI industry, that could prove dire for the company’s financial health. This is particularly concerning in contrast to the more diversified business models of Super Micro’s competitors. For now, Super Micro’s emphasis on AI is its strength. But if the demand for AI diminishes or changes drastically, Super Micro’s lack of diversification could be its downfall. On a similar note, Super Micro’s partnership with Nvidia also poses potential risks. Any production delays or competitive losses that Nvidia faces also have the potential to hurt SMCI, due to the interconnected nature of their business models.
Super Micro’s ambitious expansion into the Asia-Pacific region also introduces operational risks. The new Taiwan facility and the Malaysia campus might lead to unforeseen challenges, such as increased costs, scaling issues, and logistical challenges. Political unrest, trade tensions, or regulator issues in the volatile Asia-pacific region could also cause supply chain issues. These developments can place a lot of strain on Super Micro’s resources and could hurt the company’s profitability.
Super Micro’s extremely high multiples are also a point of concern as they might signify greater exposure to market volatility. High FWD P/E and FWD P/B ratios often reflect high investor expectations but they also indicate potential sensitivity to changes in market conditions, interest rates, or economic downturns. Furthermore, while Super Micro’s current valuation appears attractive, it might not fully reflect all these risks. The stock has seen significant growth in the past year, leading to worries of limited upside potential, and any major developments that are negative could cause a market correction.
Even with all these potential problems, Super Micro’s diversified customer base, innovative product offerings, and efficient management puts the company in a strong position to navigate market fluctuations. With a CAGR of 36.8% from 2023 to 2030, the AI sector also does not appear to be slowing down anytime soon, making an investment’s potential rewards worth the risk.
Conclusion
In conclusion, for investors who want to get into the AI sector, I wholeheartedly recommend Super Micro as a starting point. The company’s market positioning and undervaluation in spite of positive financial performance indicate that it is a strong buy. Some might call this a no-brainer after several extremely successful months for the company, but I cannot stress enough that Super Micro’s surge has only just begun. It is still marginally undervalued, possibly at risk by market volatility and partnership dependency, yet SMCI is ultimately defined by its resilience and growth potential. The company’s financial health and plans to expand are signs of stability and valuation metrics indicate that this is an undervalued stock. The sky’s the limit for the AI sector and Super Micro is poised to grow with it.
