Investing in Super Micro Computer – Is It Worth the Risk? Investing in Super Micro Computer – Is It Worth the Risk?

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By Ronald Tech

Artificial intelligence (AI) is writing the explosive growth story for most tech stocks. While the big players are always in the news, there are many overlooked and undervalued AI stocks that investors ought to pay attention to.

As the AI era progresses, the need for more powerful and efficient computing solutions is on the rise. One company that is fulfilling this need is Super Micro Computer (SMCI), whose stock soared an eye-catching 246% last year, wildly outperforming the Nasdaq Composite’s ($NASX) gain of 44.5%.

Interestingly, while the broader market has been off to a mixed start this year, it is just over a month into 2024 and SMCI has skyrocketed already. The stock has increased by a staggering 102% year-to-date. Meanwhile, bigger AI players, Nvidia (NVDA) and Advanced Micro Devices (AMD) have gained 34% and 20% YTD, respectively.

SMCI’s massive gains can largely be credited to its outstanding fourth-quarter results, as its innovative AI solutions are driving an exceptional surge in revenue and earnings. Let’s find out more.

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Super Micro Computer Reports a Blockbuster Q4

Super Micro Computer produces an advanced computing system that uses parallel processing to complete complex tasks at unprecedented speeds. Its energy-efficiency offerings have found use in a variety of fields. Currently valued at $31.1 billion, Super Micro Computer is a smaller player compared to giants Nvidia and Advanced Micro Devices, yet its efforts to capitalize on AI are rapidly driving its growth.

In its recent second quarter of fiscal 2024, total revenue of $3.66 billion increased a whopping 103.3% year-over-year. This quarter marked SMCI’s first with more than $3 billion in revenue. What’s even more impressive is that the quarterly revenue surpassed the company’s annual revenue for fiscal 2021.

The revenue growth led to a massive 71.5% increase in adjusted earnings per share (EPS) to $5.59 in the quarter. Super Micro Computer has partnered with AMD and Nvidia to use their graphic processors to expand its AI products. In the second-quarter earnings call, CEO Charles Liang discussed how the company’s AI rack-scale solutions, particularly the Deep-Learning and LLM-optimized ones based on Nvidia’s H100 processors, are in high demand.

Sky’s The Limit For SMCI Stock

Currently, SMCI is working to double the size of its current portfolio. According to the company, new platforms will be ready for high-volume production in the next few months. Management stated that the company’s AI solutions continue to capture market share, prompting them to raise their fiscal 2024 guidance to a range of $14.3 billion to $14.7 billion. Analysts predict $14.46 billion in revenue for the full fiscal year 2024. Furthermore, analysts predict an 82.9% increase in adjusted EPS to $21.60 for the full year.

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SMCI ended the quarter with $726 million in cash and cash equivalents, plus $376 million in bank debt. It also generated a free cash flow of $267 million at the end of the quarter. Growing earnings and a stable cash balance should help pay off the debt sooner. CEO Charles Liang went on to say, “Overall, I feel very confident that this AI boom will continue for another many quarters if not many years.”

Despite the explosive growth, SMCI is reasonably valued compared to its peers. Currently, it trades at 18 times forward earnings and 1.59 times forward sales. Analysts predict that revenue and earnings will grow by 28.9% and 30.7%, respectively, in fiscal 2025.

Overall, Wall Street rates Super Micro stock as a “moderate buy.” Out of the seven analysts covering the stock, five rate it a “strong buy,” one rates it a “hold,” and one recommends a “strong sell.” With the dramatic surge post-earnings, SMCI has surpassed both its mean target price and even the high target price of $450.

Following the Q2 earnings, Rosenblatt analyst Hans Mosesmann increased the target price for SMCI to $700 (a potential upside of 21%) while holding a “buy” rating.

The Key Takeaway

Looking ahead, Super Micro Computer has promising prospects. With ongoing developments in technology, science, and AI, these machines have enormous potential to contribute to groundbreaking advances in a variety of fields.

While SMCI has recorded new highs this week, it still remains undervalued for the explosive growth that it could bring in the coming years. Now might be the right time to invest a small stake in the company before the stock becomes expensive.