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Artificial intelligence (AI) has emerged as a force to be reckoned with on Wall Street, influencing nearly every industry. The technology sector, in particular, is experiencing explosive expansion. While chip demand is on the rise, making Nvidia (NVDA) the market darling ahead of tonight's closely watched earnings release, Super Micro Computer (SMCI) is meeting the demand for efficient computing solutions.
SMCI’s stock price gain of 750% in just 1 year looks distinctly abnormal, even as the AI rush has resulted in outstanding growth for most tech stocks. It's still only the beginning of 2024, and SMCI is already up 163%, wildly outperforming the Nasdaq Composite's ($NASX) 5.4% gain.
But, valued at $44 billion, SMCI stock is also down about 30% from the 52-week high it set just last week.
Super Micro's outstanding second-quarter fiscal 2024 results were a testament to its strengthening fundamentals. Wall Street believes the company will have more to offer as the AI era progresses, implying further upside for the stock.
In fact, Bank of America recently initiated coverage of SMCI stock, and set a Street-high target price of $1,040. Given the stock's already-massive gains, is this goal achievable?
SMCI’s Explosive Growth Drives Fundamentals
Super Micro Computer's server solutions are known for their exceptional processing power and compact size. SMCI's enhanced processing capabilities provide an ideal platform for AI, which relies heavily on complex and large-scale computations.
The company's partners include semiconductor industry leaders such as Nvidia, Advanced Micro Devices (AMD), and Intel (INTC). Rising demand for its products generated $3.66 billion in revenue in the recently concluded second quarter of fiscal 2024, representing a 103.3% year-over-year increase. This is also the first quarter in which the company's revenue exceeded $3 billion. Adjusted earnings per share (EPS) increased 71.5% to $5.59 during the quarter, which surpassed expectations.
In CEO Charles Liang's words, “Supermicro is at the forefront of the AI revolution, where the pace of innovation is accelerating.” He went on to say that the company's AI rack-scale solutions, particularly the Deep Learning and LLM-optimized ones powered by Nvidia's H100 chips, are becoming increasingly popular.
Rising Demand Could Lead to Hyper Growth Ahead
The rapid growth of AI is creating a high demand for specialized servers. Management believes that with a current utilization rate of about 65% from its U.S., Netherlands, and Taiwan facilities, combined with the low-cost Malaysia facility, the company can easily generate $25 billion in annual revenue.
Furthermore, to meet the demand, the company is doubling the size of its current AI portfolio. It plans to release the AMD MI300X and Intel Gaudi 3 systems soon. Management believes that the company's cash-generating programs will meet their capital requirements to support the increasing demand for their AI solutions. The company may not need to raise funds through stock dilution.
At the end of Q2, Super Micro Computer had cash and cash equivalents of $726 million along with $376 million of bank debt.
For the third quarter of fiscal 2024, management expects revenue to arrive between $3.7 billion and $4.1 billion, with earnings ranging from $5.20 to $6.00 per share. At the midpoint, this would represent triple-digit revenue and earnings growth over the prior-year quarter.
Moreover, management pointed out that “demand can last for even many decades to come - we may call this an AI revolution.”
Driven by demand for its AI solutions, the company revised its full-year fiscal 2024 revenue guidance to a range of $14.3 billion to $14.7 billion, up from the previously estimated $10 billion to $11 billion. Analysts' revenue projections are similar, with earnings expected to increase by more than 80% for the full year.
SMCI Still Remains Undervalued
While the stock price gains are remarkable, SMCI remains undervalued. It is currently trading at 26 times forward 2025 earnings and 2 times forward sales. Analysts estimate its revenue and earnings will surge by 37.9% and 37.0%, respectively, in 2025.
Comparatively, Nvidia's stock is trading at 32 times forward earnings and 18 times forward sales.
Overall, SMCI is a “moderate buy” on Wall Street. Out of the eight analysts covering the stock, six rate it a "strong buy," one rates it a "hold,” and one suggests a “strong sell.”
SMCI stock has surpassed its mean target price of $597 from analysts. On Feb. 15, Bank of America initiated coverage of SMCI stock with a “buy” rating and a new Street-high target price of $1,040. That target implies an upside potential of 38.8% from current levels.
Elsewhere, Wells Fargo analyst Aaron Rakers believes SMCI shares are “already discounting solid upside,” with investors expecting more than $30 billion in revenue in the coming years at the current valuation. Rakers went on to say, “We remain cautious on increased competition in the AI server market from traditional vendors.” Rakers has a “hold” rating for SMCI and a target price of $960.
Here's the Bottom Line on SMCI Stock
The combined power of Super Micro Computer and AI has the potential to unlock breakthroughs in nearly every industry. Thus, the long-term growth prospects of Super Micro Computer appear promising.
Despite the massive gains and hyper-growth projected over the next two years, SMCI stock remains undervalued, allowing investors to buy now before the stock rises even further. SMCI is more than just a viable investment for 2024. It remains an excellent long-term AI investment for those who believe Super Micro Computer will be able to sustain this growth for the long haul.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
