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Around since 1993, San Jose-based Super Micro Computer (SMCI) has been in the limelight over the past year or so. Due to the artificial intelligence (AI) revolution that has dominated market momentum recently, the share price of this designer, developer, manufacturer and marketer of high-efficiency server and storage solutions is up by a whopping 556% over the past year, including a rally of about 148% on a YTD basis.
However, Super Micro's not-so-micro rally ran into an obstacle late last week. On Friday alone, the stock corrected by more than 23%, its sharpest one-day decline since August 2023. Traders were rattled after SMCI said that its upcoming earnings would be released on April 30, but opted against pre-announcing the results. Now, the shares are off about 43% from their 52-week highs.
Given the valuation concerns that have surrounded SMCI and similar AI stocks, is this sharp pullback a reason to avoid the shares - or a potential buying opportunity for investors pick up shares of this newer entrant to the S&P 500 Index ($SPX)? Let's have a closer look.
Fundamentally Robust & Consistently Strong Results
Super Micro has continued to post solid growth over the years. While its revenues have clocked a CAGR of 22.01% over the past 10 years, EPS has recorded a CAGR of 35% over the same period.
The company's results for the fiscal second quarter of 2024 were marked by a beat on both revenue and earnings. Net sales more than doubled to $3.66 billion from $1.80 billion in the previous year, as new customer wins aided the overall growth. SMCI reported EPS of $5.59, up 71.5% year-over-year to surpass the consensus estimate of $3.26. Notably, the company's EPS has beaten expectations in four out of the past five quarters.
SMCI's cash position also remained strong, as the company closed the December quarter with a cash balance of $725.66 million - much higher than its short-term and long-term debt levels of $276.31 million and $99.32 million, respectively.
Super Micro's Competitive Edge
Super Micro's growth over the years is a testament to its capability to customize its server offerings according to its customers' needs. This gives Super Micro a competitive advantage, as the complexity of putting together many different components in a configuration for a specific application under time constraints is high enough to limit competition.
The company can do this because of its modular approach, which involves the use of pre-designed, compatible components that can be easily mixed and matched to create custom configurations using the latest technology. This results in rapid turnaround times, from first receiving the order to delivering the final product.
This speed, along with the company's close relationships with prominent Silicon Valley component manufacturers, gives Super Micro a key competitive edge over other AI server rivals.
SMCI's sustainable growth efforts also bode well for the future. It was one of the first companies to use liquid cooling in servers, which it promotes as a green computing initiative. For the same computing power, liquid-cooling servers take up less space than air-cooled servers, reducing the real estate footprint of the servers and effectively reducing capex if the customer owns the land containing the data center facility.
How SMCI Benefits from AI Expansion
Super Micro operates in a market that is poised for a massive boom in the coming years, thanks to AI. According to market research firm Statista, the global data center market is expected to reach almost $500 billion by 2028, based on a CAGR of 6.56% between 2024 and 2028.
Although Super Micro's overall market share is smaller compared to its larger peers like HP (HPQ) and Dell (DELL), it invests more in R&D as a part of its revenues (4%-6%) than its bigger competitors, who are closer to 2-5%. Coupled with its AI expertise and speed to market, that should help SMCI build its market share as the industry expands.
As a relatively small but rapidly growing pure-play provider in the burgeoning data center market, Super Micro is expected to emerge as a key beneficiary of this megatrend.
What's the Growth Forecast for SMCI?
Looking ahead, Super Micro's growth forecasts are also strong. Analysts are expecting the company's forward revenue growth around 58.88%, compared to the tech sector median of 6.83%. Likewise, operating profit and EPS growth are pegged at 76.69% and 76.25%, towering over the sector medians of 6.81% and 7.06%, respectively.
Overall, earnings are estimated to grow at 102.04% next quarter and 86.37% in FY 2024.
Super Micro is due to report its March quarter earnings next week, after the market closes on Tuesday, April 30.
Analysts Say SMCI Stock is a Buy
Analysts are optimistic about Super Micro stock, rating it a “Moderate Buy” with a mean target price of $968.64. This indicates an upside potential of about 38% from current levels.
Out of 12 analysts covering the stock, 8 have a “Strong Buy” rating, 3 have a “Hold” rating, and 1 has a “Strong Sell” rating.
