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While Super Microcomputer (NASDAQ: SMCI) doesn’t make the cutting-edge chips leading the AI revolution, the server and storage solutions provider is still experiencing similar, if not faster, levels of growth. Stock It recently had a remarkable month, which saw Super Micro top $1,000 per share. my investment thesis is neutral on the stock, especially after Super Micro dropped $200 to end the trading week at $803, down some $275 from its February 16 all-time high.
Source: Finviz
Riding the AI wave
A few weeks ago, Super Micro reported FQ2’24 numbers where sales grew by more than 100%:
Source: Search Alpha
So immediately, an investor has to consider that a large part of Super Micro’s recent gains is largely based on sales growth. Also, there was stock It remained flat for nearly a year before the company dramatically boosted guidance in mid-January, sparking a major stock rally.
While sales growth was barely over 100%, the AI infrastructure player reported earnings rose just 70% to $5.59 per share. Most importantly, the March guidance did not include the sales decline that occurred last FQ3, with the revenue target updated to a higher level of $4.1 billion and the EPS target to $6. had reached
Super Micro now forecasts revenue growth of around 200% in the current quarter, along with EPS growth of at least 250%. The stock rising from $250 to $800 is actually in line with the projected EPS growth for the March quarter.
Quarterly revenue is forecast to reach $4 billion for a server infrastructure play that first reached just $1 billion in sales in FQ4’21 and didn’t reach $2 billion until FQ4’22. The stock has to rally quite a bit to match the reported growth rate.
The interesting part of Super Micro is that the company provides rack solutions for data centers. While investors have to choose a GPU AI chip company to invest in. NVIDIA (NVDA) or AMD (AMD), Super Micro has solutions for all related chips from both suppliers. The AI infrastructure company is even working with the Gaudi 2 and Gaudi 3 chips. Intel (INTC) to provide customers with a complete AI server solution for estimation and LLMs.
Competitive pricing for GPUs will only increase demand for infrastructure solutions from Supermicro, as enterprises and hyperscalers buy more and more chips. The company offers innovative rack solutions with the latest technology, including liquid-cooled racks with direct-connected cooling to manage heat and lower energy costs from high-performance AI solutions.
The company will have the capacity to produce 5,000 racks per month and production is currently at a utilization rate of only 65 percent despite the massive growth rate. Super Micro is expanding capacity in both Silicon Valley and Malaysia to meet the expected ongoing growth in AI data center server solutions in the coming years.
Super Micro has led the industry in a big way, where the growth rate has been less than 20% throughout the Covid period. The company has seen rapid growth since working with Nvidia on AI infrastructure solutions, and now Supermicro predicts that the overall IT solution of software, services, storage and security will lead to $25+ billion in sales. will
Source: Super Micro FQ2’24 presentation
The data center solutions company forecasts FY24 revenue in the $14.5 billion range, which will deliver an additional $10+ billion in revenue. The company is forecasting another 70% growth to reach this internal target.
A red flag
The biggest red flag due to the hardware business is the limited gross margins. Super Micro reported an FQ2 gross margin of just 15.4%, down from 18.7% in the same quarter last year. The company is currently chasing business at the cost of margins.
AI chip companies with gross margins in the 60% to 70% range due to the complexity of the chips and limited competition. Ultimately, though, what matters to an investor is the stock’s value and business growth, regardless of whether gross margins are over 75% for Nvidia or 15% for Super Micro.
The only risk is that the low-margin hardware business may become more competitive in general because the company does not have the specialized technology to warrant a premium price. Other computer hardware companies such as Dell Technologies (DELL) doesn’t offer the same growth rate while still generating double the gross margin, up to 32% due to a superior service mix. However, the stock trades at a minimal P/E multiple due to growth issues.
After the $200 drop, Super Micro is no longer an expensive stock at all, the rally simply reflecting a massive increase in earnings. The company is already far into FQ3’24 and investors will immediately start looking at FY25 EPS targets. The stock trades at 27.5x FY25 EPS targets of just $29.22 with EPS set to expand sharply.
The stock previously traded below 10x forward EPS targets, similar to Dell Technologies. Along with the risks of low gross margins, these hardware-type companies also sell at low P/E multiples.
Investors have to answer the question of how long the AI revolution lasts. AMD has claimed that the AI chip market will grow to $400 billion by 2027, leading to massive growth over the next several years, under a scenario of increased demand for super micro data centers. Will maintain these high P/E multiples with growth rates to support them.
The company needs to grow gross margin by 100 basis points and operating income to $200 million in FY25 based on a revenue target of around $20 billion. Even after taxes, Super Micro will increase EPS by $2 to $3 per share, based on the current diluted share count of just 58 million.
The stock is cheap and Super Micro can easily start generating higher gross margins through total IT solutions, as opposed to existing hardware solutions.
take away
The takeaway for key investors is that Super Micro is definitely a tough stock to value right now. The mass growth rate does not appear to be sustainable, and the company has suffered gross margins to gain market share in a sign of stiff competition. Over time, though, Super Micro could use additional market share and total IT solutions to reduce competition and push margins further back, giving a big boost to EPS.
Despite the big rally, the stock isn’t necessarily expensive here at $800. Investors should certainly exercise caution given the volatile trading, but the weakness potentially offers an opportunity to own a major AI growth story over the next couple of years at a reasonable price.