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Unless you've been living under a rock, you've probably heard about the artificial intelligence (AI) buzz that's been sweeping the tech world. Well, it turns out that Super Micro Computer (SMCI) is one of the hottest players in the game right now. SMCI manufactures the high-powered servers and systems required to run cutting-edge AI workloads. The server maker, now valued at $56 billion, was even added to the prestigious S&P 500 Index ($SPX) in March, which means it's now appearing in some high-profile portfolios via tracking funds and indices.
Of course, being a growth-fueled tech stock, SMCI has had its fair share of ups and downs. But overall, the trend has been mostly higher; SMCI's stock price is up 870% over the past year, and 264% year-to-date. The stock's outperformance reflects its strong position in the AI infrastructure market, although - amid some heightened volatility in the past month - SMCI is now down more than 15% from its March 1 all-time high.
Now, I know what you might be thinking. With all those crazy price swings - not to mention chatter about an “AI bubble” - is it too late to take part in the SMCI rally? Well, according to quite a few Wall Street analysts, the answer is a resounding “yes!” So, what makes SMCI such a hot pick among these experts? Here are three of the key reasons analysts think Super Micro stock can keep outperforming:
1. Speed to Market
Super Micro Computer has already carved out a solid spot for itself in the competitive tech world, and a big reason for that is its incredible speed to market. The folks at Barclays have even called this SMCI's "strongest moat," which means it's their biggest advantage over the AI server competition.
With leading AI chip companies like NVIDIA (NVDA) now launching new products every year instead of every two years like they used to, Barclays thinks SMCI is well-positioned to flex this muscle. And it's not just NVIDIA - other big players like Advanced Micro Devices (AMD) and Intel (INTC) are also speeding up their product development. The brokerage says SMCI's ability to immediately match these new silicon products with a list of ready server products sets it apart from its competitors, who often face much longer development cycles.
And this speed to market is not just about having server products ready to go; it's about the comprehensive support ecosystem SMCI provides. Upon the announcement of a new silicon product by NVDA, AMD, or INTC, SMCI offers design assistance - ensuring that its server products are not just compatible, but optimized, for these new technologies.
As businesses across industries look to leverage the latest tech in AI, big data, and cloud computing, the demand for high-performance computing solutions is going through the roof. SMCI's ability to quickly bring to market server solutions that are tailored to the latest chip technologies gives it a real competitive edge. It means SMCI's customers can start using new technologies faster, which gives them a leg up in their own markets.
Barclays rates SMCI at “Overweight,” with a price target of $961.
2. Rapid AI Server Market Growth
The AI server market is undergoing explosive growth, and that's one big reason why SMCI is getting so much attention. According to industry forecasts, the AI server market is expected to balloon from $12.34 billion in 2023 to a whopping $50.65 billion by 2029. As an established leader in the market, Super Micro should be particularly well-positioned to tap into this booming growth.
In other words, as businesses rely more on AI for things like operational efficiency and data analysis, the demand for SMCI's specialized server solutions is expected to skyrocket. And it's not just about having more servers, but having servers that can handle really complex AI applications.
And while JPMorgan did acknowledge SMCI's impressive speed to market in a recent note, analysts there believe it's the expansion in the underlying AI server market that should fuel growth for SMCI.
“We expect the leadership to continue, led by a balance of custom built solutions and fast time to market, although potential upside is more likely from rapid expansion in the AI Server market rather than expansion of the already premium valuation multiple,” wrote analyst Samik Chatterjee.
Chatterjee, who started coverage of SMCI with an “Overweight” rating and $1,150 price target, sees SMCI snagging a 10-15% share of the AI server market through 2027.
3. Accelerating Earnings Growth
SMCI's revenue figures are already looking solid. In their second-quarter earnings report for fiscal 2024, released on Jan. 29, they reported revenue of $3.66 billion, which is a massive 103% increase from the previous year and higher than the expected $2.80 billion. Analysts think revenues will keep climbing to $3.94 billion in the next quarter.
Critically, SMCI isn't just expanding its top line as the AI revolution rolls on; it's also showcasing a remarkable acceleration in earnings per share (EPS), a key indicator of a company's profitability.
The numbers don't lie. In Q2 2024, SMCI reported adjusted EPS of $5.59. That's not only higher than what analysts expected ($4.93), but it's also a whopping 106.3% increase from the previous year's $2.71. This kind of EPS growth shows that SMCI is not only growing its revenue but also managing its costs really well, which means bigger profits.
The forecast looks bright, too. Analysts think EPS will surge 86% to $21.97 for the full fiscal year 2024, with continued bottom-line growth to $30.59 expected for fiscal 2025.
Analysts at Argus, who have the Street-high price target of $1,350 for SMCI, have called out the company's impressive ability to turn top-line growth into bottom-line results. In a recent note, the analysts said SMCI is “repeating the pattern of Apple (AAPL), Amazon (AMZN), and most recently Nvidia (NVDA),” by growing its revenues at a much faster pace than its costs. Argus rates SMCI a “Buy.”
The Bottom Line on SMCI Stock
In a nutshell, SMCI's unmatched speed to market, expectations for explosive AI server market growth, and its rapidly accelerating earnings all make the stock a compelling idea at current levels. As a pivotal player poised to capitalize on the high-performance computing demand, SMCI could be the perfect addition to your portfolio to ride the wave of AI innovation.
Overall, the 12 analysts tracking Super Micro have deemed the stock a “Moderate Buy,” with a mean price target of $868.64. That's a discount to current prices, but that Street-high target of $1,350 is a premium of 30%. Out of this group, 8 analysts call the stock a “Strong Buy,” compared to just 3 “Holds” and 1 “Strong Sell.”
