Server and storage solutions provider Super Micro Computer, Inc. (NASDAQ:SMCI) has gained considerable investor attention, which is evident from its share price soaring by more than 1,000% over the past year.
The high demand for the company’s rack-scale Total IT Solutions and optimized AI computer platforms amid the AI boom has appealed to investors largely.
Interestingly, the company’s huge prospects for customizable products and solutions for AI needs made investors reward it almost four times more than the so-called top AI gainer, NVIDIA Corporation (NASDAQ:NVDA).
The stock’s skyrocketing rally led to an eye-popping valuation, but it’s worth assessing whether the hype-driven rally is overdone for Super Micro Computer stock.
Can SMCI Win The AI Race?
With the launch of ChatGPT, the world learned just how far generative AI can take operative functioning, making AI the Wall Street buzzword. According to Precedence Research, due to such transformative impacts, the global AI market is expected to grow at a CAGR of 19% to reach $2.58 trillion by 2032.
While many big technology names have experienced a resurgence as AI enthusiasm grips investors, some fast-growing companies have also emerged. One such pioneer is Super Micro Computer.
Although the company started operations in the early 1990s and has been profitable every year since, it has garnered significant attention recently by keeping pace with technological proliferation. The company offers rack-scale innovations that help businesses achieve breakthroughs in AI infrastructure.
The company’s complex and higher-value rack-scale solutions bolster AI infrastructures by enhancing power efficiency, optimizing power consumption, dissipating heat, and providing cooling, which increases workload efficiency. Moreover, its plug-and-play racks can run applications right after deployment, demonstrating efficacy.
In this space, SMCI works closely with chip giants Intel Corporation (NASDAQ:INTC), Advanced Micro Devices, Inc. (NASDAQ:AMD), and undoubtedly the biggest name in the AI market today, NVIDIA. Super Micro’s servers are loaded with AMD and Intel CPUs, as well as high-performance NVIDIA GPUs.
Working closely with other big names in the AI field, the company has positioned itself as a significant player.
It optimizes AI operations, which can imply long-term profitability in the rapidly growing AI market that demands faster and more efficient operations.
Is Super Micro Profitable?
SMCI is highly profitable in each of the past ten years consecutively with net income ranging from $46 million to a high of $640 million in 2023.
Super Micro’s financials reveal that the company is thriving. In the last quarter (which the company reports as Q2 of fiscal 2024), net sales stood at $3.66 billion, increasing 103.2% from the prior-year period. This was due to the considerable demand for its rack-scale solutions from its end-users, which resulted in a higher average selling price.
Its non-GAAP net income improved 76.5% year over year to $329.46 million, translating to a non-GAAP net income per share of $5.59, a 71.5% improvement from the year-ago value.
However, its non-GAAP gross margin declined 330 basis points compared to the prior-year period, from 18.8% to 15.5% in the last quarter. The company attributed this decrease to its intense focus on market share gains.
As of December 31, 2023, total cash and cash equivalents were about $726 million, and total bank debt was about $376 million, which looks favorable. The company is trying to grow further, as evidenced by its increase in net cash required for net working capital of $945.10 million, which decreased net cash provided by operating activities by $799.30 million for the six months ending December 31, 2023.
Furthermore, fueled by its quarterly top line growth, Super Micro raised its fiscal year 2024 revenue guidance from $10-$11 billion to $14.30-$14.70 billion.
Is Super Micro Stock Overvalued?
Shares of Super Micro have appreciated by more than 5,000% over the past five years and more than 2,500% over the past two years, so valuation looks quite stretched.
The stock currently trades at a forward non-GAAP P/E of 49x, which is substantially higher than the industry average and the five-year average of 13.12x.
On the other hand, the company has grown significantly over the past few years, and Wall Street analysts expect its earnings per share for fiscal 2024 to grow 84.4% year over year.
Factoring in analysts’ growth expectations over the next three to five years, SMCI’s forward non-GAAP PEG is only 1.01, which is quite reasonable by industry standards.
Wall Street analysts do not deem the company’s valuation sustainable. Their near-term price target of $822.54 indicates a potential 27.2% correction in the share price. Goldman Sachs initiated coverage on Super Micro with a “Neutral” rating and a price target of $941, which indicates a potential downside of 16.7%.
However, the lack of enthusiasm on Wall Street doesn’t necessarily mean it’s wise to sell the stock. The company has positioned itself in a lucrative market that could potentially expand significantly in the future.
Moreover, analysts and management alike posit that its financials still show a scope for improvement. As SMCI shows long-term growth prospects, attractive entry points are likely to present.
The Bottom Line
SMCI is a tale of two halves now. On the one hand, valuation is stretched with analysts consensus price target sitting at $822 per share and a discounted cash flow forecast even more pessimistic at $682 per share.
Key multiples like price-to-earnings and even price-to-earnings growth ratio are elevated. So while analysts forecast rapid bottom line growth, it appears the market has already priced in the bullish expectations.
As such, SMCI appears to have run too far too fast in the short-term. Over a longer time horizon, however, the bullish AI story is unlikely to wane even if it dips near-term. That secular trend should prove to be a bullish tailwind for SMCI over the coming years.
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