We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where Super Micro Computer, Inc. (NASDAQ:SMCI) stands against the other undervalued stocks.
With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.
Concentration of S&P 500
Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.
The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”
Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.
There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.
However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.
Are The US Stocks Overvalued or Undervalued?
The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.
The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.
Our methodology
We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why are we interested in 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)
Forward P/E as of August 22: 18.35x
Number of Hedge Fund Holders: 47
Expected EPS Growth this Year: 58.3%
Super Micro Computer, Inc. (NASDAQ:SMCI) designs, develops, manufactures, and sells server solutions based on modular and open-standard architecture. It provides servers, motherboards, chassis, and accessories.
With higher investments in AI infrastructure, Super Micro Computer, Inc. (NASDAQ:SMCI) continues to benefit from higher orders for memory and storage products. In 2Q 2024, the firm delivered year-on-year growth of 143% in sales to $5.3 billion.
The company was earlier included in the S&P 500 this year. As we know, to be included in this list, a company is required to have positive earnings for 4 consecutive quarters. The massive surge in the stock price was primarily backed by its partnership with NVIDIA Corporation (NASDAQ:NVDA) and the placing of its AI chips in the servers. As a result of such industry trends, the stock gained over ~3000% in 5 years. Now, the company’s board has approved a 10-for-1 stock split.
In the latest fiscal year, the company saw revenues of $14.9 billion, exhibiting a huge rise over its FY 2023 revenue of $7.1 billion. The company’s results were supported by strong demand for its AI servers. Moving forward, Super Micro Computer, Inc. (NASDAQ:SMCI) might post strong sales figure given that it plans to bring a new manufacturing facility in Malaysia online later this year. The company is also quite optimistic about the growing demand for DLC servers. The company believes it can help data center operators reduce energy costs by up to 40%. At the same time, it will also improve computing performance.
As a result, Super Micro Computer, Inc. (NASDAQ:SMCI) decided to quickly add more DLC server rack capacity. This should help the company achieve long-term gains.
Analysts at The Goldman Sachs Group gave the price target of $675.00 and provided a “Neutral” rating for the company on 8th August. As per Insider Monkey’s 2Q 2024 database, Super Micro Computer, Inc. (NASDAQ:SMCI) was part of 47 hedge funds’ portfolios, up from 35 in the preceding quarter.
Polen Capital, an investment management company, released its second-quarter 2024 investor letter and mentioned Super Micro Computer, Inc. (NASDAQ:SMCI). Here is what the fund said:
“The second largest contributor to the Portfolio’s relative performance was Super Micro Computer, Inc. (NASDAQ:SMCI), a provider of high- performance, energy-efficient servers, which the Portfolio does not own. The stock declined notably in the quarter, providing a tailwind to relative performance. On a YTD basis, however, Super Micro is still our largest relative detractor, given its robust 1Q return.”
Overall SMCI ranks 11th on our list of the most undervalued stocks to buy. While we acknowledge the potential of SMCI as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued 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.
