Is SMCI Stock Overvalued?

It’s been a rollercoaster of a ride for investors in 2023, not least because of the explosion in top-tier cloud computing and semiconductor stocks throughout the year.

Indeed, the catalyst for the boom has clearly been the revolution in artificial intelligence (AI) and the rise of so-called large language models, ignited as it was by the launch of ChatGPT last November.

While the spotlight has often fallen on more famous names like Intel and Google, a less well-known underdog from the often-overlooked server market has emerged as a likely victor in this new technological leap.

For instance, Super Micro Computer, Inc. (NASDAQ:SMCI), a San Jose-headquartered information technology company with manufacturing bases in Europe, Taiwan, and America, has skillfully etched out a lucrative niche within the AI industry, propelling its stock to soar by an almost unimaginable 620% in the last twelve months.

This exceptional achievement of SMCI mirrors the broader patterns influencing the technology industry today and demonstrates the company’s insightful strategy and resilient business model. With the world embracing digital transformation at an accelerated pace – and various sectors seeking avenues to harness the power of AI – there’s a notable surge in demand for cutting-edge servers and storage systems that Super Micro has so adequately fulfilled.

However, as with any tale of triumph, it is essential to go beyond the surface-level details. Notwithstanding SMCI’s upward trajectory, the road ahead is laden with unpredictability, and the AI industry, despite its potential, is fiercely competitive and swiftly evolving.

So, let’s dive deeper into the factors that have contributed to Super Micro’s success – and uncover the hidden pitfalls that could scupper its future plans.

Why Has SMCI’s Stock Shot Up So Much?

Having already established itself as a trusted go-to vendor within the server and storage sector, Super Micro Computer’s competitive advantage lies in its ability to offer high-powered, custom-built frameworks that prioritize energy conservation and remain economically feasible.

Indeed, according to its own estimates, SMCI reckons it can improve power usage effectiveness to the tune of more than 30 fossil fuel power plants, while also helping to make over $10 billion worth of total cost of ownership savings across the industry.

In fact, SMCI’s configurations are celebrated for their design superiority, merging advanced technology and premium components to deliver unparalleled performance. Its product range spans from single-processor units suitable for small businesses to multi-processor servers designed for large-scale enterprise operations. This broad spectrum of offerings enables SMCI to serve a diverse clientele with varied requirements.

Furthermore, in the domain of storage networks, SMCI has demonstrated an equal degree of innovation. The firm’s solutions are meticulously designed to offer extensive storage space, expandability, and efficiency, rendering them ideal for ventures dealing with substantial amounts of data. SMCI’s storage formations come equipped with state-of-the-art functionalities like interchangeable drives, backup power supplies, and comprehensive management features, augmenting their dependability and ease of use.

However, the advent of machine learning algorithms has proved to be a massive tailwind for SMCI, as AI applications require potent computing capabilities and substantial storage – both of which are SMCI’s strong suits.

Likewise, the company’s servers are adept at managing the demands of deep learning workloads, making them a compelling choice for businesses investing in the metaverse and other AI-adjacent segments.

SCMI Financial Results

Unusually for a business that has seen such positive price momentum of late, the firm’s third quarter of fiscal year 2023 earnings results were fairly underwhelming. Its revenue haul of $1.28 billion came in much lower than previously anticipated, with year-on-year and sequential declines of 5.88% and 28.9%, respectively.

However, things were much improved regarding profitability metrics, with the company’s gross margin increasing 210 basis points annually to 17.6% and its non-GAAP diluted net income per share expanding from $1.55 in 2022 to $1.63 today.

Crucially, the future outlook for Super Micro Computer Inc. appears bright. The company expects its top line to be between $1.7 billion and $1.9 billion, while its net income should spike to somewhere in the range of $2.21 to $2.71.

Is SMCI A Buy?

The most obvious question for investors right now is whether Super Micro Computer’s stock is overbought. Its stock has appreciated by astronomical proportions over the last 18 months, and a cursory glance at the price charts suggests that this is a company with nowhere to go but down.

Indeed, similar to the dot-com bubble of the 1990s, prospective shareholders would be wise to restrain their emotions when mindlessly embracing any new novelty.

But from a purely quantitative perspective, SMCI appears less expensive than first thought. For example, going off of the firm’s own projections, its quarter-on-quarter revenue growth is slated to be, at worst, around 33%, whereas its earnings will be, at best, over 66%.

Moreover, the company can boast a return on total assets of 18.4%, which is a notable fraction compared to the Information Technology median of 0.06%.

Naturally, given its 252% increase in market cap year-to-date, you’d assume SMCI’s price-to-earnings ratio would have skyrocketed.

Interestingly, however, that really isn’t the case. Yes, its forward non-GAAP multiple of 27.2 is steeper than its peers at 19.4, but that isn’t an excessively onerous premium.

In fact, given that the data center accelerator market is expected to grow at a CAGR of 24% between now and 2032, buying Super Micro Computer stock could be the most profitable thing you ever do.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.