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Since going public in 2007, Super Micro Computer (SMCI) shares have delivered stratospheric returns for shareholders. In the last five years alone, SMCI's share price has gained a whopping 2,294%. A leading provider of high-performance computing (HPC) systems, server technology, and storage solutions, Super Micro specializes in designing and manufacturing custom-built systems tailored to various industries' specific needs, including cloud computing, artificial intelligence (AI), machine learning, and data centers.
This specialization and expertise in providing cooling systems for servers has led to the company bagging high-profile customers like AI poster child Nvidia (NVDA) and electric vehicle (EV) market leader Tesla (TSLA) as its customers.
Is Super Micro Stock Oversold?
However, since reaching its all-time high in March of this year, Super Micro Computer stock has been on a steady downward spiral - which was recently accelerated by a scathing report from short-seller Hindenburg Research. Among myriad accusations, Hindenburg cited undisclosed related-party transactions and accounting irregularities at Super Micro, and suggested it was losing the backing of key customers like Tesla and Nvidia. Investors rushed to sell the stock when the company delayed filing its 10-K annual report shortly after the Hindenburg allegations came out.
Despite the stock's recent slump, SMCI is still up 63.8% on a YTD basis, easily outperforming both the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX).
Moreover, a recent brokerage note from analysts at Needham suggests that the stock's recent sell-off may be overdone, noting that some analysts' projections for single-digit margins described as “too pessimistic.”
After its recent free-fall, SMCI stock looks reasonably valued. The stock is priced at 13.63x forward adjusted earnings, which is a healthy discount to the tech sector median and its own five-year historical average. Similarly, the forward price/sales ratio is just 0.95, suggesting that it's possible to buy SMCI's future earnings and revenue growth at a discount.
Currently, analysts tracking the stock are expecting Super Micro Computer to report earnings per share (EPS) growth of more than 41% this fiscal year, with revenue expected to surge 87%.
The Big Picture for SMCI
The primary markets served by Super Micro Computer are set for boom times. According to industry forecasts, the AI server market is forecast to reach a market size of $177.4 billion by 2032, clocking a CAGR of 18% between 2024 and 2032. Further, IDC stats suggest that data center storage capacity is expected to grow at a CAGR of 18.5% from 10.1 zettabytes (ZB) in 2023 to 21.0 ZB in 2027, fueled largely by AI.
Super Micro's capabilities should position it well to cater to this growing market. Its capability to customize its server offerings according to its customers' needs 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. Moreover, it invests more in R&D as a part of its revenues (4%-6%) than its bigger competitors, who are closer to 2-5%.
SMCI 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. That said, SMCI's pivot to liquid cooling is applying margin pressure at a time when the market's highest-flying AI stocks seem to be under the most intense scrutiny.
Inside SMCI's Fundamentals
One key aspect behind the gravity-defying rise in Super Micro stock over the years has been its significant top-line and bottom-line growth. Over the past 10 years, the company has grown its revenues and earnings at impressive CAGRs of 26.12% and 36.41%, respectively.
In its fiscal Q4 of 2024, Super Micro's EPS grew 78.1% to $6.25, which fell short of estimates. Revenues surged to $5.29 billion, up an impressive 143% from the year-ago period on “record demand of new AI infrastructures,” which edged past the consensus $5.31 billion forecast.
For the current quarter, management guided for per-share earnings in the range of $6.69 to $8.27, with revenue expected between $6 billion and $7 billion. Full-year revenue is projected between $26 billion and $30 billion. The guidance topped Wall Street's estimates, which called for fiscal first-quarter earnings of $7.68 per share on $5.47 billion, with full-year revenue projected at $23.6 billion.
Super Micro Computer closed the quarter with a cash balance of about $1.7 billion, higher than its short-term debt levels of $1.5 billion. Additionally, SMCI said that its board approved a 10-for-1 stock split, which will take effect Oct. 1.
Notably, despite the delay of its 10-K filing, Super Micro Computer has since said that it “does not anticipate the 2024 Form 10-K will contain any material changes to its results for the fiscal year and quarter ended June 30, 2024 that were announced in the Company’s press release dated August 6, 2024.”
However, the fiscal Q4 EPS shortfall, along with a miss on gross margins (11.3%, down from long-term averages between 14-17%), sent SMCI stumbling 20% lower on Aug. 7 as investors reacted to its quarterly earnings report. Analysts at Bank of America downgraded the stock to “Neutral” following the report, warning of margin pressure throughout fiscal year 2025 on increased business from lower-margin hyperscale customers and liquid cooling ramp costs.
What's the Analyst Forecast for Super Micro Computer Stock?
Analysts have grown less optimistic on SMCI recently, including today's price-target cut from Loop Capital. The firm kept a “Buy” rating, but slashed its price target to $1,000 from $1,500, even as analyst Ananda Baruah seemed to acknowledge the overdone hand-wringing among investors in a note accompanying the target cut: "We believe the supposition of SMCI's demise is greatly exaggerated and that its importance to the Gen AI server conversation is underappreciated," wrote Baruah.
Overall, the consensus rating on Super Micro Stock is still a “Moderate Buy” among the 14 analysts in coverage. Four have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 8 have a “Hold” rating, and 1 has a “Strong Sell” rating.
The mean price target for SMCI is $782.31, indicating expected upside potential of 67.8% from here.
On the date of publication, Pathikrit Bose 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.
