Shares of Super Micro Computer (SMCI -11.84%) have pulled back after hitting a 52-week high of $1,077 in February. The stock currently hovers around $873, equaling a year-to-date increase of 207%, following a positive quarterly report from Nvidia (NVDA 0.35%) that points to growing demand for Supermicro’s server solutions.
The incredible performance has investors wondering if the company’s recent growth is sustainable, and if so, how much upside may be left in the shares. Supermicro, as it is better known, is not as dominant in its market as Nvidia is in artificial intelligence (AI) chips, but that doesn’t mean the stock isn’t worth buying.
Supermicro is a leading supplier of AI-optimized servers and rack solutions for data centers. The company’s plug-and-play rack systems house the advanced chips from leading semiconductor providers, so when Nvidia reports booming demand for its chips, it is good news for Supermicro’s business.
It is starting to see accelerating revenue growth as the supply of AI chips becomes more available in 2024. The company averaged annualized top-line growth of 20% over the last 10 years, but revenue accelerated to a year-over-year increase of 103% in the quarter ending in December.
The stock’s run this year shows that investors expect last quarter’s impressive growth to continue, as more data centers shift away from central processing units (CPUs) toward the more powerful processing capabilities that graphics processing units (GPUs) provide for AI training.
Investors should be aware that Supermicro operates in a competitive industry, which is evident by the company’s low profit margin. Most businesses convert about 10% of their revenue to a profit, but Supermicro’s profit margin was 8% over the last year. By comparison, Nvidia’s dominance in AI chips allows it to command premium prices for its products and earn a lofty profit margin of 42%.
Supermicro’s low margin doesn’t leave it a lot of room to keep profits up if revenue were to dip due to a sluggish environment for data center spending. But the company’s improving margin shows the AI boom is playing to its strengths.
Supermicro has a competitive advantage in being first to market with new innovations in storage and server systems, and this is why many companies turn to its server products as interest in AI grows.
“The exciting news is that finally, we are entering in an accelerating demand phase from many more customer wins,” CEO Charles Liang said on the company’s recent earnings call. The company’s commentary and actions point to a huge opportunity ahead.
All investors need to do is look where the business is investing. Supermicro is in the process of opening a new facility in Malaysia to expand production capacity, which Liang said will support annual revenue in excess of $25 billion.
Company guidance calls for strong demand to continue in the second half of fiscal 2024, with full-year revenue reaching $14.3 billion to $14.7 billion, or more than double fiscal 2023 revenue.
Given the long-term tailwinds that are driving growth for AI-optimized data center infrastructure, Supermicro can likely increase revenue by double-digit rates for several years. Analysts expect revenue to reach $20.3 billion by fiscal 2026, with earnings per share of $33. Using those estimates, the stock could climb to over $1,300 in the next few years if it is still trading at a forward price-to-earnings ratio of 40.
Supermicro is a low-margin business that reflects the stiff competition for server solutions, but it is encouraging that management is seeing more customers come to it first as AI demand heats up. While I would never bet the house on any stock no matter how well it is performing, I believe Super Micro shares could still hit new highs in the years to come.
