We recently compiled a list of the Jim Cramer Reveals 12 Stocks Investors Should Monitor Closely. In this article, we are going to take a look at where Super Micro Computer Inc. (NASDAQ:SMCI) stands against the other stocks that should be monitored closely according to Jim Cramer.
In a recent episode of Mad Money, Jim Cramer discussed the current state of the economy, noting that there are essentially two separate economies at play. One economy is struggling with higher interest rates, making it harder for businesses and individuals to thrive, while the other seems unaffected by these rates. This division explains why, even after a double rate cut, the stock market, including the Dow, S&P, and Nasdaq, still experienced declines.
“There really are two economies in this country. There’s one that needs lower interest rates because business is slowing and it’s harder to find a job, and then there’s another that says we don’t really care about where the rates are. That’s how we can get a double rate cut today and still see the Dow dipping 103 points, the S&P declining 29 points, and the Nasdaq shedding 31 points.”
Jim Cramer: Tech Companies Flourish Despite Economic Concerns
Jim Cramer highlights that many companies, especially retailers and restaurants serving low-income customers, are worried about high interest rates and needed the recent double rate cut to improve their forecasts. While this cut benefits the housing and industrial sectors, which initially rose in stock prices before selling off, the tech sector in Silicon Valley remains largely unaffected. Cramer describes tech leaders as having escaped the constraints of interest rates, focusing on innovation and catering to businesses rather than consumers. Their success relies more on their ability to innovate than on interest rate fluctuations.
“There are so many companies I talk to that truly worry about the economy and say they can’t make their forecasts because rates are too high. We’ve been hearing that from most retailers and restaurants, especially those that cater to the less well-off. They needed this double rate cut—believe me. It’s great for housing, and it can help the industrials; those stocks ran in anticipation and sold off when we got what we wanted. That is a very typical action.
But how about the tech economy, the one based out here where we are right now? When you’re talking to companies in Silicon Valley, it almost feels like the people who run these companies are like inmates who escaped from the asylum of interest rates years ago. What they do is exploit opportunities that allow them to become integral to the enterprise. They don’t really care about the consumer; they’re selling to businesses that then sell to you. So their total addressable market doesn’t hinge on interest rates; it hinges on how innovative they are. That’s a story you’ve heard from all the companies we’ve interviewed. These are companies about innovation.”
Additionally, he explains that tech companies are not selling everyday goods like homes, washing machines, or cars. Unlike housing, which relies on lower mortgage rates to boost sales, the tech sector focuses on creating software that simplifies the home-buying process. While lower rates can encourage new businesses, many startups are too small to need extensive software solutions.
“You see, these tech companies aren’t selling homes; they aren’t selling washing machines or cars or steel or plastic—things worth less than a dollar that are sold for more than a dollar at a dollar store. Housing, of course, needs lower mortgage rates to get sales going. Tech doesn’t care about mortgage rates; they just want to create software that reduces some of the friction you encounter in the process of buying a home. Lower rates make it more likely that people start new companies, but most new companies are too small to need major enterprise software. Companies we talk to can see small-cap companies go up, but big enterprise software? Not so much.”
Cramer notes that the Federal Reserve cut rates to help control inflation, which benefits more businesses overall. However, in the tech industry, the focus is on increasing efficiency through automation, often resulting in fewer employees. These tech companies aim to avoid being affected by the Fed’s decisions because relying on them would indicate weakness and vulnerability to the economic cycle, which they actively seek to evade.
“The Fed wanted to be sure that inflation is contained and going in the right direction, which then allowed them to relent and cut by 50 basis points. Now, more businesses in the East can thrive, but out here, the presumption is that all enterprises are trying to raise margins, often by automating everything that can be automated, which means using fewer people. These tech companies are automators; they never want to be hostage to the Fed. They don’t want you to be hostage to the Fed because that would be a sign of weakness—a sign of cyclicality. Oh, they hate cyclicality. Why be hostage to the business cycle if you don’t have to?”
Rising Stars: Artificial Intelligence (AI) Boosts Profits Even as Sales Slow
Finally, Jim Cramer emphasizes that many people see artificial intelligence as a key player in today’s market. Companies that leverage AI can improve their profit margins, which boosts earnings even if their overall sales are declining. This means that even without increasing sales, AI can help businesses become more profitable.
Our Methodology
This article summarizes Jim Cramer’s latest Morning Thoughts, in which he analyzed several stocks. We selected 12 companies and ranked them by their ownership levels among hedge funds, beginning with those that are least owned and moving to those that are most owned.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of technicians in a server room, testing and managing the newest server solutions.
Super Micro Computer Inc. (NASDAQ:SMCI)
Number of Hedge Fund Investors: 47
Jim Cramer mentioned that Needham has begun coverage of Super Micro Computer Inc. (NASDAQ:SMCI) with a “buy” rating and set a price target of $600. However, he expressed that he is still waiting for more clarity regarding Super Micro Computer Inc. (NASDAQ:SMCI)’s accounting practices before feeling fully confident in the investment.
“Needham likes Super Micro Computer and started coverage with a buy and a $600 price target. I am still waiting for some clarity when it comes to the company’s accounting.”
Super Micro Computer, Inc. (NASDAQ:SMCI) has a strong outlook, reflected in its impressive Q2 2024 performance, which showed $1.5 billion in revenue, a 30% increase from last year, and a net income of $100 million. This growth is driven by high demand for Super Micro Computer, Inc. (NASDAQ:SMCI) computing solutions, especially in data centers and AI applications.
The rising investment in data centers, fueled by cloud computing and AI, positions Super Micro Computer, Inc. (NASDAQ:SMCI) well in this growing market. Super Micro Computer, Inc. (NASDAQ:SMCI) offers innovative server solutions specifically designed for hyperscale data centers. By focusing on AI and machine learning technologies, Super Micro Computer, Inc. (NASDAQ:SMCI) optimizes its servers for these applications to meet the increasing needs of businesses adopting AI.
What sets Super Micro Computer, Inc. (NASDAQ:SMCI) apart from competitors is its ability to deliver customized solutions, attracting a diverse range of clients, including enterprises and government organizations. Super Micro Computer, Inc. (NASDAQ:SMCI) is also expanding globally by entering emerging markets that require advanced computing solutions, which should further boost revenue. Effective supply chain management ensures timely product delivery, enhancing customer relationships and competitiveness.
Carillon Scout Mid Cap Fund stated the following regarding Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter:
“Super Micro Computer, Inc. (NASDAQ:SMCI) was the top detractor to returns in the second quarter. Super Micro designs and manufacturers server solutions based on modular and open-standard architecture. This modular approach combined with a strong engineering culture helps the company to supply the market with advanced servers and rack-scale compute solutions quickly.
After an impressive return in the first quarter, the company offered disappointing near-term earnings guidance, though we do not believe its long-term opportunity has diminished. We expect continued strong growth for several years, although the range of outcomes is quite wide; it is difficult to forecast AI server market growth with precision.”
Overall SMCI ranks 10th on our list of the stocks that should be monitored closely according to Jim Cramer. While we acknowledge the potential of SMCI as an investment, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SMCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.