Super Micro Computer, Inc. (NASDAQ:SMCI) stock is tanking following its just-announced fiscal Q1 earnings. This is a stock we have not covered publicly, it was a gem reserved for our investing group, and admittedly, we had members who bought higher. When shares bounced up to $315, we suggested taking profit, though in full disclosure our price target was (and remains) $325 longer term. It is hard not to view that as a win, and yet, we, and many of our members today are at a loss for words on this selloff. It is in our opinion, unjustified. While the market is never wrong generally, sometimes it overreacts. This seems to be an overreaction, and while we have a number of options strategies to keep the income flowing, simply holding bought premium or the commons has led to heartache today.
We will get right to the point. The earnings were strong. It was a beat and raise. We consider the action a classic bad beat in which the stock is getting punished through no fault of the company. As we stated today in our chat room:
“No one in there right mind would have thought shares would sell down, you made the right decision”
That decision was to close some covered calls. The implied volatility was so high into earnings that the return on covered calls even if the stock did not move would have been so great. At worse, you got called away tomorrow after collecting a sum.
Why do we view this selloff as unjustified? We do not need to sprinkle you with the earnings details, which you can find anywhere, but a few key points are most notable.
First, the guidance had everyone on edge, and it was stellar guidance. We suppose some anxiety lingers in the supply chain concerns, but we felt that this was covered well in the report and on the call. That said, the guidance was TREMENDOUS. This is a term we do not take lightly at all. Folks, for the fiscal second quarter sales will be between $2.7 billion and $2.9 billion, way above the consensus $2.52 billion estimate. Moreover on stronger sales and well-controlled operating expenses all things considered, EPS was forecast to be between $4.40 and $4.88 per share. We cannot stress how strong of a guide this is, so far beyond the $4.11 per share analysts were looking for as a whole.
As we remarked:
“that SMCI guide….just impressive, not sure what the market wants when this is a now high growth, and strong value stock…we are talking net sales of between $2.7 billion to $2.9 billion, way above the $2.52 billion consensus estimate, while EPS of $4.40 and $4.88 per share, drastically above the $4.11 consensus. And yet shares are reversing. Silly.”
What do we mean by the growth and value? Given that the company guided up tremendously for fiscal Q2, we think fiscal 2024 can hit $18.50 in EPS. At the time of this writing SMCI is trading at $229, so we are talking about 12.4X FWD EPS for an AI data center booming company. Revenue growth of over 50% will take us there provided supply chain constraints do not return. Once we get to fiscal 2025 it gets cloudy for where growth goes, it will be hard to lap comps like what we expect, but expect growth nonetheless. Here is a very simple shot taken of the growth and value metrics side by side.
And, it is worth noting that these figures do not account for today’s drop, so the value metrics are even stronger than these lagged images, while the growth with today’s revised higher guidance gets even stronger.
And management is responding to the demand and supply issues, as future capacity will expand. In about 6 months, the company will complete a dedicated capacity for manufacturing 100 kilowatt racks with liquid-cooling capabilities, and the company will be able to expand total rack production capacity to 5,000 racks per month in full-speed mass production. Upcoming products are ready for volume production to meet demand of several key customers, not just Nvidia (NVDA) but also Intel (INTC) and Advanced Micro Devices (AMD).
On the bearish side, one could argue a possible slowing in demand, or political back and forth could hurt demand, through regulation or controls, etc. Fair enough, but we have seen the valuation all by nearly 30%, we think any of that is and was priced in.
The fact is that Super Micro Computer, Inc. surpassed handily its fiscal Q1 earnings expectations, is working through supply issues, is expanding capacity to meet demand, and has significantly expanded its sales and earnings outlook.
This is a buy if we ever did see one.
Your voice matters
We would love to hear your take, especially bearish ones. Is this selloff justified? Are you employing options approaches? Is this just an AI fad that is going to continue to fade, or do you see it as an amazing buying opportunity like we do? Let the community know below.
