Advantages of Super Micro Computer
I believe that Super Micro Computer, Inc. (NASDAQ:SMCI) stock is still too cheap to fully price in the true growth potential of its operations over the next 3-5 years. With a strong market position, several external tailwinds, and internal financial strength, SMCI stock appears poised for another stellar year for investors.
The Company’s Strategic Position
Super Micro Computer, Inc., a global leader in high-performance server and storage solutions, specializes in developing and manufacturing cutting-edge products based on modular and open architecture. With a comprehensive product portfolio, including complete server and storage systems, modular blade servers, workstations, networking devices, and security software, the company caters to diverse markets such as enterprise data centers, cloud computing, artificial intelligence, and 5G and edge computing. Supermicro’s Building Block Solutions allow for the rapid development, testing, and manufacturing of server and storage systems with unique configurations.
Untapped Growth Potential
The first thing that struck me in SMCI’s story was management’s strategy to grow revenue to $20 billion over the long term (today the company makes ~$7.4 billion in TTM sales). The goal looks ambitious, but the growth potential of the end market’s size (aka TAM) justifies it. According to Grand View Research, the storage market for High-Performance Computing (HPC) will grow significantly in the coming years with a CAGR of 7.5% between 2023 and 2030. The US market share will grow even faster with a CAGR of 8.1%.
The second justification for the $20 billion goal is SMCI’s recent positive momentum: over the last 12+ months, SMCI’s growth has outpaced industry norms by more than five times, and the exponential growth momentum looks breathtaking.
Another justification for the company’s ambitious goal is its competitive moat. SMCI’s market share in the AI server space grew from 7% in Q3 FY2023 to 17% in Q4, at the expense of larger competitors. This is attributed to the company’s building block solutions, setting it apart from other Tier 1 manufacturers.
Financial Performance and Outlook
In Q1 FY2024, Super Micro Computer reported net sales of $2.12 billion, a slight decrease from the previous quarter’s $2.18 billion and a YoY increase of 14.6%. The company’s gross margin for the quarter was 16.7%. Despite a general decline, SMCI’s results exceeded consensus expectations on a normalized basis, indicating resilience in a challenging sector.
The company generated a healthy cash flow from operations during the quarter, with a strong balance sheet reflected in its total cash and cash equivalents of $543 million and total bank debt of $146 million. Despite ongoing GPU supply constraints, SMCI raised its fiscal year 2024 revenue outlook and aims to maintain its competitive edge through continued emphasis on research and development.
Overall, the growth backdrop for SMCI remains rich with strong tailwinds, positioning it for significant expansion over the coming years. The company’s financial position, along with its strategic initiatives, reflects its potential for sustained growth, making SMCI an exciting prospect for investors.
