As we ease into 2024, the tech stocks and AI theme have not taken a back seat to value, contrary to some expectations. What worked during the first seven months of 2023, such as the
Magnificent Seven and AI equities, has returned to favor. With attention-grabbing bitcoin ETFs making headlines and AI still capturing the eyes of investors, shares of Super Micro Computer (
) have rallied sharply following a period of consolidation.
This stock is now upgraded from a hold to a buy. The valuation has improved from last year as earnings growth has verified well. Moreover, the technical situation looks better as the stock encroaches on all-time highs. However, sales growth risks are a concern.
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According to Seeking Alpha, SMCI develops and manufactures high-performance server and storage solutions based on modular and open architecture in the United States, Europe, Asia, and internationally.
The California-based $19.1 billion market cap Technology Hardware, Storage, and Peripherals industry company within the Information Technology sector trades at a near-market 19.8 forward price-to-earnings multiple, a significant discount to the Information Technology sector’s P/E, and does not pay a dividend. Implied volatility ahead of its earnings report due out later this month is high at 78%, and short interest on the stock is elevated at 9.5% as of January 10, 2024.
It was a somewhat tough few months following SMCI’s stock price surge to near $360 last summer. Recall late last year there was a slew of negative headlines. First, on December 1, 2024, the company announced a $524 million securities
offering comprised of 2.1 million shares of common stock at a price of $262.
SMCI dipped following that issuance news, and then came the headline that both Super Micro’s CEO Charles Liang and CFO David Weigand
sold significant amounts of stock. Monitoring insider transaction trends is a key part of forming an investment outlook, and selling, while not inherently bearish, can cast clouds on a stock that has run up.
Finally, analysts at Susquehanna
cut their rating on SMCI to negative, citing concerns that margin pressures are intensifying amid heightened competition and rising costs for memory and storage. The stock is up more than 30% since that call, however. Despite these seemingly bearish catalysts, price action has told a different story.
SMCI Growth Versus Its Industry
Bigger picture, Super Micro
reported a strong set of Q1 2024 results back in early November last year. Non-GAAP EPS of $3.43 topped the Wall Street consensus estimate of $3.25 while revenue of $2.1 billion, up 15% from year-ago levels, was a modest beat. The management sees FY 2024 net sales between $2.7 billion and $2.9 billion, with Q2 2024 non-GAAP EPS in the $4.40 to $4.88 range.
SMCI: Guidance Released in November
valuation, with current consensus EPS forecasts above $17 this year and above $20 for the out year, the stock is not all that expensive. The significant risk is that sales growth is slowing from a high 51% rate this year to just 4% by 2026. Thus, I assert that a very high earnings multiple is not warranted. Rather, if we apply a 20 multiple on $18.50 of non-GAAP EPS over the coming 12 months, then shares should trade near $370 fundamentally. That is up about 10% from my
previous outlook given that
earnings growth has materialized. There are upside risks to that valuation, and a strong technical situation warrants an upgrade.
SMCI: Rising EPS Trends, Sales Growth Slowing
SMCI: A Forward P/E Under 20
Compared to SMCI’s
peers, the company sports very healthy growth metrics, while the valuation view is not as sanguine. I found that a high price-to-book ratio on SMCI may be the culprit bringing down the valuation rating (a price-to-book ratio is not an especially useful metric for a high-growth tech company, however).
profitability trends are robust while share-price
momentum with SMCI is stout – I will detail that later. Finally,
EPS revisions have been lackluster lately, but another earnings beat later this month, should it occur, would likely cause some bearish analysts to rethink their outlook. SMCI has topped bottom-line estimates in 11 of the past 12 quarters.
Traders have priced in a high 9.9% implied move after the January 30 earnings report, according to Option Research & Technology Services (ORATS).
Earnings History: 11 Out of 12 Beats, 9.9% Implied