Server and cloud IT provider Super Micro Computer (NASDAQ:SMCI) may not be receiving as much attention as companies like Meta, Palantir and NVIDIA, but the stock has generated some of the best performance among tech companies over the past year.
SMCI has not only outperformed its peers but also remained at reasonable valuation levels while doing so. Why did SMCI go up so much and will it come crashing down to earth now?
How High Will SMCI Go?
To say that SMCI shares have seen stellar performance in 2023 would be an understatement. The stock is up 197 percent year-to-date and over 150 percent in the last three months alone.
However, this isn’t the entirety of the growth story for SMCI. Although the company has seen its share prices rise quickly this year, the run the stock is currently on goes back to 2022. Over the last 12 months, SMCI has risen more than 468 percent.
This fact puts SMCI in sharp contrast to many of the other tech companies currently experiencing massive rebounds. C3.ai, for instance, is up over 300 percent YTD but only 189 percent in the past 12 months.
NVIDIA, likewise, is up 192 percent YTD and 173 percent over the trailing 12-month period., As such, SMCI’s run has been longer, larger and much smoother than many other high-growth tech stocks.
Why Did SMCI Go Up So Fast?
The most fundamental reason for SMCI’s climbing price is the accompanying run-up in its earnings over the last two years.
As recently as 2020, the company was reporting profits of well under $0.50 per share each quarter. In each of the last three quarters, earnings exceeded $2 per share, with the quarter before last even topping $3.
Over the next 12 months, analysts expect earnings of about $8.28 per share from SMCI. It should be noted, though, that this is a drop from the trailing 12-month period.
Beyond earnings, SMCI is also improving its revenues and margins. As of the most recent quarterly report, trailing 12-month revenues totaled $6.57 billion, compared to just $4.63 billion a year earlier.
The company’s gross margin has improved from 15.5 percent to 17.6 percent over the last year, and SMCI’s return on equity of 34.7 percent makes it attractively profitable for such a high-growth company.
To some extent, the run on SMCI has also been a correction. Throughout much of 2022, the stock traded at low multiples to its earnings. Dips late last year brought the stock’s P/E ratio to less than 10, at one point bottoming out at 6.8.
In light of the earnings that have been reported in recent quarters, it has since become apparent that the stock was sharply undervalued at that time. Today, SMCI trades at a trailing P/E of about 23, roughly matching the S&P 500’s current average of 25.6.
SMCI investors have also benefitted from the recent surge in stocks related to AI technology. While other companies may deploy AI software to great commercial effect, SMCI aims to provide the server infrastructure needed to power the artificial intelligence boom. This places SMCI as a pick-and-shovel play on an industry where software giants will compete vigorously for market share.
Finally, SMCI’s own success may be tied to that of NVIDIA. The two companies share a strategic partnership, but NVIDIA is by far the more high-profile. In fact, SMCI included NVIDIA in the rollout of its planned AI development platform in March. With both NVIDIA and AI as an industry surging, investors have naturally been drawn to the much more reasonably priced investment in SMCI.
Does SMCI Still Have Room to Run?
Even though SMCI has quadrupled in the past year, there’s at least a chance that the stock could continue to rise. SMCI still trades at less than 25 times its earnings, putting it at a fairly reasonable multiple.
The company is also attractive due to the company’s low debt levels – SMCI’s debt-to-equity ratio was a minuscule 0.08.
It’s also important to consider the company’s potential for future sales. In recent weeks, SMCI has introduced a new array of servers that can provide the computing power necessary for the rollout of commercial AI services.
These servers are also more energy efficient than the company’s existing units, thanks to enhanced liquid cooling capabilities. Continuing innovation at SMCI could propel it toward future growth, especially as more companies invest in cloud computing, AI and energy-efficient data centers.
Another key point in SMCI’s favor is the degree of investment management has in the company. Insiders currently own about 14.5 percent of SMCI, creating a high degree of alignment between executives and the company’s long-term performance. While insider selling has accelerated amid the sharp increase in share prices, this high percentage of insider ownership could be a positive trend for all shareholders over the long term.
With that said, SMCI is far from a low-risk stock. After its meteoric rise, the stock now trades within 2.5 percent of its median analyst price target of $250.
This may suggest that SMCI is nearing its intrinsic value and could run out of room to rise without additional growth catalysts. SMCI shares could also fall if the widely perceived AI bubble eventually pops, something that could easily happen in response to future interest rate hikes.
Even with these potential pitfalls, however, SMCI appears promising for risk-tolerant investors with reasonably long time horizons. Unlike many of the overhyped AI stocks in today’s market, SMCI generates substantial earnings and does not appear to be particularly overvalued.
As such, SMCI could offer an increasingly rare balance of growth potential and fair value in the tech sector. While this volatile stock certainly won’t be the right fit for every portfolio, SMCI is performing impressively as a business and could continue to generate returns for its shareholders over the long haul.
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.