A long track record of success could help drive this artificial intelligence (AI) hardware specialist to new heights.
It’s hard to overstate the degree to which artificial intelligence (AI) has altered the technology landscape since early last year, and nowhere is that more apparent than in the ranks of the world’s most valuable businesses.
While the No. 1 position has changed hands several times over the past 12 months, it’s currently occupied by Apple. The company’s recent AI announcements have energized the Apple faithful, driving its market cap to $3.4 trillion.
With its full-court press into AI, Microsoft takes up the No. 2 spot at $3.1 trillion. Nvidia, with its industry-leading AI chip, has doubled over the past year to earn the No. 3 spot at $2.9 trillion. Alphabet, Amazon, and Meta Platforms — each with solid AI game plans of their own — are also members of this exclusive fraternity, with market caps of $2.1 trillion, $1.9 trillion, and $1.2 trillion, respectively (as of market close on Wednesday).
With a market cap of just $41 billion, it might seem like an exaggeration to suggest that Super Micro Computer (SMCI -7.08%), also called Supermicro, might have a shot at joining the $1 trillion club. However, the strong, accelerating demand for servers designed to harness the power of AI — and the company’s years of experience in the field — suggest Supermicro might have the qualities needed for membership.
Image source: Getty Images.
Growing like wildfire
While Supermicro has only recently caught the attention of AI-centric investors, the company has been serving up custom-designed servers for more than three decades. This track record of experience served Supermicro well when those wanting to harness the power of generative AI came calling.
The company’s claim to fame is its track record of developing power-miserly, rack-scale servers that boast a lower cost of ownership. Yet these cost-efficient systems are still able to provide the computational horsepower necessary to harness the power of AI and hyperscale data centers.
Furthermore, Supermicro’s building-block architecture ensures it can create a system to accommodate any budget or technology level. Finally, partnerships with the most important names in AI chips, including Nvidia, Advanced Micro Devices, and Intel, among others, ensure a steady supply of the most in-demand processors.
This successful strategy has helped generate meteoric growth. For its fiscal 2024 third quarter (ended March 31), revenue surged 200% year over year to $3.8 billion, while its earnings per share (EPS) of $6.56 soared 329%. Management is forecasting its triple-digit growth will continue, raising its full-year revenue guidance to $14.9 billion, which would represent growth of 109%.
Management said Supermicro grew 5 times faster than the industry average over the preceding 12 months, suggesting the company is gaining market share. Analysts at Northland came to the same conclusion, noting the company has increased its market share from 8% to 11%, with “plenty of room for future share gains.”
Finally, in a nod to Supermicro’s importance within the broader market, the stock was added to the Nasdaq-100 Index on July 22.
The path to $1 trillion
Supermicro has the inside track when compared to its rivals. When demand for AI servers ratcheted up last year, the company was nimble enough to adjust on the fly. Its strong relationships with all the top AI chipmakers gave Supermicro a steady supply of the processors needed to outfit its high-end servers. That said, it will be some time before Supermicro achieves the title of trillionaire.
According to Wall Street, Supermicro is on track to deliver revenue of $14.9 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 2.75. Assuming its P/S remains constant, Supermicro would have to grow its revenue to about $363 billion annually to support a $1 trillion market cap. Still, those days are a long way off, as Supermicro is scrambling to increase its production capacity to support sales of $25 billion.
If the company can keep up its triple-digit year-over-year growth, Supermicro could reach the $1 trillion market cap as soon as 2029. However, even the bulls concede that maintaining growth of that magnitude is unlikely to happen. What’s more likely is that the growth rate tapers off to a more manageable 50%, in which case Supermicro could reach a $1 trillion market cap by 2032.
Some on Wall Street believe the demand for AI-capable servers will continue for years. Bank of America analyst Ruplu Bhattacharya calculates the market will increase at a compound annual growth rate of 50% over the next three years, maintaining that Supermicro’s revenue could “grow even faster.”
This helps underscore the massive opportunity. If Supermicro captures just a small part of that windfall, the company will be a member of the $1 trillion club in short order.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Bank of America, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.