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With the artificial intelligence (AI) revolution in full swing, Super Micro Computer (SMCI) has received a lot of attention in the tech sector (and the broader stock markets) over the last few years. SMCI is a global market leader in high-performance computing (HPC), server technology, and storage systems. As AI takes over the tech world, demand for SMCI's products continues to rise, as evidenced by the company's strong fundamentals.
SMCI, like so many other tech stocks, has recently undergone a stock split. The company’s 10-for-1 stock split became effective on Oct. 1. However, the company has faced challenges in recent months following the release of a Hindenburg Research report accusing it of accounting manipulation. Furthermore, Super Micro postponed filing its annual report with the U.S. Securities and Exchange Commission (SEC). These challenges have alarmed investors, driving the stock down by 51% in the last three months.
Nonetheless, SMCI stock has surged 45.5% year-to-date, compared to the tech-heavy Nasdaq Composite’s ($NASX) gain of 20.8%. Wall Street believes there is much more upside over the next 12 months. Considering the challenges Super Micro is experiencing, let’s find out if this stock is a buy now.
Short-Term Headwinds Are Pressuring SMCI
While short-term headwinds continue to weigh on the stock, Super Micro Computer remains a crucial supplier to tech giants involved in AI research and development.
Super Micro Computer's success stems from its ability to provide customized, high-performance computing solutions to various industries, including the cloud computing, data center, AI, and Internet of Things (IoT) industries.
In the fourth quarter of fiscal 2024, revenue increased by 76.6% to $3.85 billion. Additionally, adjusted earnings per share (EPS) rose 78% year-over-year to $6.25. However, gross margin fell to 11.2% from 17% in the same quarter last year.
While declining gross margins are not a good sign, management has projected that gross and operating margins will gradually rise in fiscal 2025, benefiting from lower manufacturing costs as production ramps up. Management believes that its investments in Malaysia and Silicon Valley expansions will strengthen its position as the AI revolution continues.
Furthermore, management stated that strong demand for the company's new AI infrastructures resulted in a 110% increase in full fiscal year 2024 revenue to $14.9 billion, with earnings increasing by 87%.
Charles Liang, President and CEO, stated, “We are well positioned to become the largest IT infrastructure company, driven by our technology leadership, including rack-scale DLC liquid cooling and business values of our new Datacenter Building Block Solutions.”
As AI applications grow exponentially, there is an increasing demand for servers that can handle complex workloads. Super Micro has tailored its products and expanded its market reach by collaborating with key tech players such as Nvidia (NVDA), Intel (INTC), and AMD (AMD) to meet AI's computing power requirements. This year, the company revealed three Supermicro SuperCluster solutions powered by Nvidia's most recent GPUs. As of June 30, the company had $1.6 billion in cash and cash equivalents and $2.1 million in total bank debt and convertible notes.
For fiscal 2025, the company expects revenue of around $26.0 billion to $30.0 billion, consistent with consensus expectations. Analysts predict outstanding revenue and earnings growth of 87% and 51.5%, respectively, in fiscal 2025. In fiscal 2026, revenue and earnings are expected to increase by 13.9% and 28.6%, respectively.
SMCI is an affordable buy right now, trading at 12 times forward 2025 earnings, given its leadership in AI-powered computing and strong growth in emerging technologies. SMCI’s stock represents a compelling opportunity for investors looking to capitalize on the surging demand for AI and high-performance computing solutions.
What Does Wall Street Say About SMCI Stock?
Following the stock split, Loop Capital Markets analyst Ananda Baruah reiterated a “buy” rating with a target price of $100. Meanwhile, Barclays analyst George Wang, CFA, maintained his “hold” rating on SMCI, with a price target of $42.
Overall, Wall Street rates SMCI stock as a “moderate buy.” Out of the 14 analysts who cover Super Micro stock, four rate it as a "strong buy," one rates it as a “moderate buy,” eight suggest a "hold," and one recommends a "strong sell."
Based on its average target price of $72.92, the stock has a 76.8% upside potential over the next 12 months. Furthermore, the Street-high estimate of $130 suggests a 215% upside from current levels.
Overall, for those with a high risk tolerance and a long-term outlook, SMCI could be an appealing addition to a tech-heavy portfolio, especially for those betting on the continued expansion of AI and cloud computing infrastructure. However, investors should keep an eye on how the company handles its current challenges before investing in this AI stock.
On the date of publication, Sushree Mohanty 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.
