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After a disappointing run in 2022, the tech sector has staged a stellar comeback year-to-date. But after a breakout performance during the first seven months of 2023, tech valuations have corrected alongside the broader market in August as investors remain cautious about future Fed rate hikes and a sluggish global economy.
For investors, the recent pullback in stocks provides an opportunity to buy shares of quality companies trading at a discount. One such tech stock that is flying under the radar is Super Micro Computers (SMCI), valued at a market cap of $13.78 billion. The stock has gained more than 200% in 2023, easily outperforming the broader tech sector - but it's now down nearly 30% from the all-time highs set earlier this month.
However, SMCI stock has crushed the broader markets since its IPO in March 2007, rising more than 3,000% in this period. Let’s see if the tech stock can continue to outperform in 2023 and beyond.
Is SMCI a Good Stock to Buy?
Super Micro Computers provides application-optimized, higher-performance server and storage solutions that address computational-intensive workloads. Its Building Block Solutions enables the company to develop, build, and test server and storage systems and subsystems. These capabilities offer SMCI an economic moat in markets such as 5G, data centers, artificial intelligence (AI), and public and private cloud.
SMCI has increased sales from $3.33 billion in fiscal 2020 to $7.12 billion in fiscal 2023 (ended in June). Simultaneous with this rapid top-line growth, the company increased adjusted earnings per share by 56% annually in the last five years.
In fiscal Q4 of 2023, SMCI reported revenue of $2.18 billion, an increase of 34% year over year. Similar to other players in the AI space, SMCI also benefited from record demand for AI-related systems in plug-and-play rack-scale.
Due to the demand for its infrastructure solutions, SMCI continues to evaluate its footprint beyond the recently announced expansion in Malaysia. It added another new building in Silicon Valley and aims to further increase the current 4,000 racks per month capacity in fiscal 2024.
To support robust demand from key domestic partners, SMCI is building another manufacturing facility in North America. Right now, its U.S. headquarters and Taiwan facility can support $15 billion in annual sales, while the new facility in Malaysia should result in higher sales by serving scale builds at a reduced cost.
SMCI’s investment in its 4,000 racks-per-month validation and production facility is a crucial driver in delivering high-performance AI racks, positioning the company to enter fiscal 2024 with record order backlogs, design wins, and new customers.
What's Next for SMCI Stock Price and Investors?
Looking ahead, analysts tracking SMCI expect earnings to rise by 32.3% to $14.37 per share in 2024 and by 14.7% to $16.48 per share in 2025. SMCI stock is priced at 2 times forward sales and 17 times forward earnings, which is relatively cheap for a growth stock.
Out of the five analysts tracking SMCI, three have a “strong buy” recommendation, and two call it a “hold” - with not a single bearish rating to be found after the latest upgrade from Wedbush. Wall Street has an average price target of $344, which is 38% higher than the current trading price.
Now that event-related volatility tied to the highly anticipated Nvidia (NVDA) earnings report has largely been priced in, it looks like an opportune time to pick up shares of this outperforming stock at a relative discount.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
