This artificial intelligence (AI) hardware provider has joined the S&P 500 index and initiated a stock split this year.
The S&P 500 (^GSPC -0.03%) is the most widely followed index in the U.S., representing the 500 largest companies in the country. Given the breadth of companies that make up the benchmark, many consider it the most dependable measure of total stock market performance. To qualify for membership in the S&P 500, a company must meet the following prerequisites:
- Be based in the U.S.
- Have a market cap of at least $8.2 billion
- A minimum of 50% of its outstanding shares must be available for trading
- Must be profitable on a GAAP basis in its most recent quarter
- In aggregate, must be profitable over the preceding four quarters
Super Micro Computer (SMCI 2.25%), also known as Supermicro, is one of the most recent entrants to the S&P 500. It made the cut in March, and is one of only 11 companies added to the fold so far this year. To the delight of shareholders, the artificial intelligence (AI)-centric server maker recently completed a 10-for-1 forward stock split. The move was preceded by revenue that jumped 955% and net income that surged 1,030%. This has fueled an impressive rise in its share price, which soared 1,780%, as the rapid adoption of generative AI fueled accelerating sales and boosted its profits.
Despite these impressive gains, many on Wall Street believe there’s more upside ahead. Let’s look at Supermicro’s competitive advantages, the challenges it’s facing, and whether or not it’s a buy.
Image source: Getty Images.
A winning serve
Supermicro has a track record of creating custom servers going back 30 years, so when the need for solutions geared toward the unique demands of generative AI exploded on the scene, the company was there to answer the call. The secret to Supermicro’s success is its modular building-clock architecture. By manufacturing these components separately, the company can offer a wide variety of servers and storage systems customized to meet each customer’s specific needs, from build-to-suit to plug-and-play rack-scale systems. Supermicro also offers support to help customers “install, upgrade, and maintain their computing infrastructure.”
Another advantage is the company’s strong relationships with the industry’s most sought-after chipmakers. This ensures that Supermicro has access to a steady supply of the most cutting-edge semiconductors to power its systems. Furthermore, energy efficiency has captured the spotlight, the result of power-hungry AI solutions. Supermicro’s long history of focusing on energy efficiency quickly attracted the industry’s attention.
The past year has been one for the record books for Supermicro. For fiscal 2024 (ended June 30), revenue surged 109% year over year to a record $14.9 billion. At the same time, its earnings per share (EPS) soared 76% to $20.09. Management said it continues to see “record demand,” as sales have increased five times faster than the industry average during the past 12 months, which helps illustrate that Supermicro is taking market share from its rivals. CEO Charles Liang suggested that the company controls an estimated 80% of the direct liquid cooling (DLC) server market for AI.
The company is experiencing growing pains, as evidenced by sinking margins, though management attributes those to product mix and a bottleneck related to certain components. On the plus side, the $800 million in affected sales weren’t lost, but rather pushed into the current quarter.
CFO David Weigand said that “We have a path to improve gross margins to the target range of 14% to 17%,” citing improving manufacturing efficiencies. The company also expects to boost profit margins when new manufacturing facilities come online later this year, which should also increase production capability to support $50 billion annually in sales.
That’s not to say there aren’t risks. Supermicro was the target of a short attack by Hindenburg Research, which alleged accounting irregularities without providing much in the way of proof. Supermicro then fanned the flames when it announced its annual report would be filed late. If that weren’t enough, reports emerged that the Department of Justice (DOJ) had opened an investigation in the wake of the short report.
If the company can work through these challenges, chances are the stock will continue its relentless climb higher.
Wall Street is still bullish on Supermicro
In the light of these dark clouds, you might think that Wall Street would be abandoning Supermicro en masse — but that’s simply not the case. Of the 17 analysts who covered the stock in September, seven rate the stock a buy or strong buy, and none recommend selling. Furthermore, an average price target of roughly $77 suggests there’s still upside potential of 62% compared to Supermicro’s closing price on Friday.
Loop Capital analyst Ananda Baruah remains the biggest Supermicro bull on Wall Street, with a buy rating and a Street-high, split-adjusted price target of $100. That suggests potential gains for investors of 111% compared to Monday’s closing price. The analyst believes Supermicro’s leadership was likely already aware of the DOJ probe and is cooperating with regulators. Baruah went on to say the company could more than double its revenue run rate to $40 billion over the next couple of years, which should fuel an increase in its stock price.
For those willing to take on some additional risk, Supermicro offers a persuasive value proposition. It’s currently selling for 23 times earnings and less than 2 times sales — the very definition of an underpriced stock.
Supermicro’s industry-leading position, secular tailwinds, and attractive price combine to represent a compelling opportunity for savvy investors.