We came across a bullish thesis on Super Micro Computer (SMCI) on ValueInvestorsClub by Motherlode. In this article we will summarize the bulls’ thesis on SMCI. Super Micro Computer shares were trading at $69 when this thesis was published, vs. closing price of $624.65 on Aug 2. However, SMCI stock is down 30% over the last month. Should investors consider buying SMCI stock after the recent drop?
A computer network engineering team setting up a server array in a data center.
Super Micro Computer, commonly known as Supermicro, has emerged as a leading stock in the artificial intelligence (AI) sector. The company specializes in high-performance, liquid-cooled servers for data centers, with about half of its revenue coming from dedicated AI servers. This focus has made Supermicro an ideal partner for Nvidia, granting them early access to Nvidia’s high-end data center GPUs and a competitive edge over traditional server companies like Dell Technologies and Hewlett Packard Enterprise (HPE).
Supermicro’s growth has been impressive. Although the company faced pandemic-related disruptions and supply chain issues from fiscal 2019 to 2021, resulting in a sluggish compound annual growth rate (CAGR) of less than 1%, it rebounded strongly. From fiscal 2021 to 2023, revenue increased at a CAGR of 42%, and earnings per share (EPS) surged at a CAGR of 134%, primarily driven by robust AI server sales.
Looking forward, Supermicro’s growth prospects remain strong. Analysts project that from fiscal 2023 to 2026, the company’s revenue and EPS will grow at CAGRs of 58% and 52%, respectively. These growth rates are notable for a stock trading at just 27 times next year’s earnings. The global AI server market is expected to grow at a CAGR of 26.5% from 2024 to 2029, according to Research and Markets.
Supermicro’s bullish case centres on its early-mover advantage in the AI server market, increasing market share, and expanding partnerships beyond Nvidia to include AMD and Intel. Loop Capital, which co-managed a $1.7 billion senior unsecured convertible notes offering for Supermicro, is particularly optimistic. They believe Supermicro is well-positioned to benefit from the expanding AI market. Loop Capital’s analysis suggests that if Supermicro meets Wall Street’s expectations and maintains its valuation, its stock price could reach nearly $1,100 by early fiscal 2026. To hit Loop Capital’s high target of $1,500, the stock would need to trade at about 37 times forward earnings, which is reasonable for a high-growth AI stock.
However, competition from Dell and HPE, which are also expanding their AI server businesses, could limit Supermicro’s growth and squeeze margins. Additionally, Supermicro’s partnership with Nvidia is not exclusive, and competitors are also seeking Nvidia’s data center GPUs. Broader risks include potential cooling of the AI market due to tighter regulations, geopolitical tensions, and export curbs.
Despite these risks, Supermicro’s long-term outlook appears promising. If the company maintains its lead in liquid-cooled, high-end servers and continues to expand its share of the AI server market, it could exceed even the most optimistic price targets over time. While investors should be prepared for volatility, Supermicro’s strong growth rates and strategic partnerships make it a compelling investment in the rapidly expanding AI sector.
SMCI is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 35 hedge fund portfolios held SMCI at the end of the first quarter which was 41 in the previous quarter. While we acknowledge the potential of SMCI as an investment, our conviction lies in the belief that 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 as promising as 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.