Supermicro’s Surge: A Look at Growth, Challenges, and Future Potential

The S&P 500 (SNPINDEX: ^GSPC) is the leading index in the United States, noted for its representation of the 500 largest companies in the nation. Due to this extensive coverage, it is regarded as a trustworthy indicator of overall stock market trends. To become part of the S&P 500, a company must satisfy several criteria:

• Be headquartered in the U.S.
• Possess a market capitalization of at least $8.2 billion
• A minimum of 50% of its outstanding shares should be available for trading
• Report profitability on a GAAP basis in its latest quarter
• Show aggregate profitability over the past four quarters

Super Micro Computer (NASDAQ: SMCI), commonly known as Supermicro, is a recent addition to the S&P 500, joining in March. It is among only 11 companies added this year. Shareholders were pleased when the company executed a 10-for-1 forward stock split, following a staggering revenue increase of 955% and a net income rise of 1,030%. This momentum led to a remarkable 1,780% increase in its stock price, driven largely by the rapid growth of generative AI.

Despite these extraordinary gains, many analysts suggest there may be even more growth potential. We will examine Supermicro’s competitive strengths, the challenges it faces, and whether investing in it is advisable.

Image source: Getty Images.

Key Advantages in a Competitive Landscape

With a legacy of 30 years in custom server production, Supermicro quickly adapted to cater to the growing demands of generative AI solutions. The core of its success lies in its modular architecture, allowing the company to provide a diverse range of customizable servers and storage options to match specific client needs. Furthermore, Supermicro supports customers in installing, upgrading, and maintaining their technological infrastructure.

Close partnerships with leading chip manufacturers give Supermicro access to the latest semiconductor technologies, enhancing its competitiveness. The increasing focus on energy efficiency—an important factor for AI solutions—has positioned Supermicro as a frontrunner in that area.

Fiscal 2024 proved to be a milestone for Supermicro, with revenues soaring 109% from the prior year to hit a record $14.9 billion. Earnings per share (EPS) also climbed 76% to $20.09. Management noted continuing high demand, with sales growing five times faster than the industry average, signifying market share gains against competitors. CEO Charles Liang mentioned that Supermicro currently holds around 80% of the direct liquid cooling (DLC) server market for AI.

However, the company faces challenges, including diminishing margins attributed to product mix and supply chain bottlenecks. Fortunately, the $800 million in sales delays are not losses but rather carryovers into the current quarter.

CFO David Weigand expressed optimism, stating that they are on track to achieve gross margins between 14% and 17% with improved manufacturing processes. The onset of new production facilities later this year is also expected to enhance output, supporting sales goals of up to $50 billion annually.

Nonetheless, there are risks to consider. Supermicro has faced scrutiny following a short-seller report from Hindenburg Research that claimed financial discrepancies without substantial evidence. Compounding matters, the company announced a delay in its annual report and faced investigations from the Department of Justice (DOJ) following the short report concerns.

If Supermicro navigates these challenges effectively, its stock may continue its upward trajectory.

Analyst Outlook Remains Positive

Given these challenges, one might expect a mass sell-off at Supermicro, but that’s not the case. Out of 17 analysts covering the stock as of September, seven rated it a buy or strong buy, with no recommendations for a sell. Moreover, the average price target of about $77 suggests a potential upside of 62% compared to the company’s recent closing price.

Loop Capital analyst Ananda Baruah stands out as a strong supporter of Supermicro, maintaining a buy rating and a bold price target of $100, offering a possible 111% increase based on Monday’s closing price. Baruah believes Supermicro’s leadership is likely cooperating with the DOJ, and envisions the company potentially more than doubling its revenue to a $40 billion run rate in the coming years, which could further boost the stock price.

For investors willing to accept certain risks, Supermicro presents an attractive value proposition with a current earnings multiple of 23 and sales valuation under 2 times—a clear indicator of undervaluation.

With its premier industry position, growth trends, and appealing valuation, Supermicro stands out as a notable investment opportunity for informed investors.

A Unique Opportunity for Investors

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*Stock Advisor returns as of October 21, 2024

Danny Vena has positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.