Super Micro Computer (SMCI) is movin' on up.
On Monday, the San Jose, Calif.-based tech company will be leaving the S&P MidCap 400 and heading over to the greener pasturers the S&P 500.
And when we say "green," we ain't kidding.
Super Micro makes high-end servers used in artificial intelligence applications and now that AI is all the rage, the company has become very popular on Wall Street.
Shares skyrocketed 1,000% in 2023 and while Super Micro was going for $285.45 on Jan. 2, the stock finished the trading day on March 13 up 2.2% to $1,188.07.
Bank of America sees a big future for the server sector, thanks largely to artificial intelligence.
From 2006 to 2023, the firm said, the server market grew revenues at mid-single digit compound annual growth rate (5.4%), and units at low-single digit CAGR (2.8%).
"We see Artificial Intelligence (AI) driving most of the future growth in server revenues over the next 4-years," BofA said in a recent report.
AI drives server growth
"We model the overall server market growing revenues double-digits (about 23% CAGR) between 2023-2027, while server units grow at high-single digits (8.6% CAGR) in the same timeframe," the firm said.
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BofA said that within its coverage universe, the firm sees Super Micro, Dell (DELL) , and Hewlett Packard Enterprise (HPE) directly benefiting from higher AI server demand.
On March 13, the firm raised its price target for Super Micro to $1,280 from $1,040 per share while keeping a buy rating on the stock.
BofA's analysts said in a research note that the firm was raising its expectations for artificial intelligence server industry growth, based on its semiconductor analyst team's revised outlook for the accelerator TAM, or total addressable market, which helps businesses understand the maximum revenue they could generate if they had 100% market share.
"We now expect industry revenues to grow from about $39 billon to about $200 billion between 2023-2027.
Super Micro delivered surprising revenue, earnings, and guidance on Jan. 30, earning an adjusted $5.59 a share on sales of $3.66 billion in the quarter ended Dec. 31.
This was the company's first quarter ever with over $3 billion revenue and the quarter's sales total surpassed Super Micro’s annual revenue for 2021.
Analysts polled by FactSet had expected Super Micro earnings of $5.05 a share on sales of $2.8 billion.
“Overall, I feel very confident that this AI boom will continue for another many quarters if not many years," CEO Charles Liang told analysts during the company’s earnings call. "And together with the related inferencing and other computing ecosystem requirements, demand can last for even many decades to come, we may call this an AI revolution.”
Analysts see strong revenue growth
Liang also said that the demand for AI inferencing systems—where live data is run through an AI model to make a prediction or solve a task --and mainstream compute solutions have also started to grow.
BofA said that Super Micro's competitive advantages include building block architecture which helps to quickly incorporate new technology and reduce time to market.
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The firm also cited the company's relationships with leading AI providers including Intel (INTC) , Nvidia (NVDA) , and AMD (AMD) , as well as Super Micro's ability to customize configurations to specific customer applications and its liquid cooling offerings.
Liquid cooling is a method used to lower the temperature of computer processor units, and sometimes graphics processor units .
BofA said that Super Micro priced convertible senior notes due 2029 to institutional buyers on Feb 23rd. The company’s primary cash needs have been for increasing working capital to support strong revenue growth.
Cash is also needed for financing real property acquisitions, the firm said, and the convertible notes do not bear regular interest. Super Micro was able to raise cash for working capital and business expansion, without increasing its annual interest expense related to the offering.
“We expect SMCI to continue to see strong revenue growth given server demand from applications including Artificial Intelligence (AI), High Performance Computing (HPC), big data analytics, engineering/technical workloads, streaming and content delivery, and compute-intensive graphics and online gaming,” BofA said.
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