Shares of the high-performance server and storage systems supplier Super Micro Computer (SMCI) are easily among the best-performing stocks over the past year. SMCI stock has risen by over 1,000% (1,013.83%, to be precise) in the last 52 weeks. Further, SMCI has gained over 301% year-to-date. This outsized rally in Super Micro shares has been driven by the higher adoption of artificial intelligence (AI) computing, which has significantly propelled demand for its products.
The company’s high-performance and high-efficiency server and storage systems find applications in various high-growth end markets, including AI, cloud computing, enterprise data centers, 5G, and edge computing.
Super Micro Computer’s recent financial performance speaks volumes about the demand and growth potential. In the last quarter alone, the company achieved a remarkable revenue of $3.66 billion, marking a staggering 103% increase from the year-ago quarter. What’s even more impressive is that this quarterly revenue surpassed the company’s entire annual revenue for 2021.
Management attributed this extraordinary growth to robust demand and improving supply conditions for graphics processing units (GPUs) and related key system components. The demand for Super Micro's leading AI platforms, particularly the LLM-optimized NVIDIA HGX-H100 solutions, AI inferencing systems, and mainstream computing solutions, has been the key catalyst for growth.
While Super Micro Computer will likely benefit from AI-led tailwinds, its stock price has appreciated quite a bit. This raises concerns about its valuation.
Against this backdrop, let’s see how high Super Micro Computer stock can climb in the next 12 months, and whether buying it near the current valuation makes sense.
The Bull Case for SMCI Stock
Super Micro Computer has emerged as a top AI infrastructure solutions provider. Moreover, the company’s management is confident that the AI boom will continue for many more quarters, providing a solid foundation for growth. In fact, with the growing demand for inferencing and other computing ecosystem necessities, management anticipates that this demand will persist for many decades.
To meet growing demand, the company is set to double the size of its AI portfolio, with the introduction of new platforms such as NVIDIA CG1, CG2 Grace Hopper Superchip, and various Central Processing Units (CPUs) and GPUs.
Moreover, Super Micro Computer is expanding its manufacturing capacity, with plans to increase rack production capacity up to 5,000 racks per month. Additionally, the company is adding two new production facilities and warehouses, including one in Malaysia, to enhance volume and lower costs.
It’s worth noting that modern GPU infrastructures face high energy costs, power grid constraints, and thermal challenges. As a result, Super Micro Computer is witnessing increased demand for its Direct Liquid Cooling (DLC) solution, which requires lower system power requirements and delivers improved performance and reliability. The company’s leadership expects up to 20% or more of global data centers to transition to liquid-cooled solutions in just a few years, providing a significant growth opportunity for Super Micro Computer.
Looking ahead, the strong demand will drive the average selling price, supporting its sales. Additionally, with a robust pipeline of new products and an expanding customer base, Super Micro Computer is well-positioned to deliver strong financial performance and gain market share.
Super Micro Computer expects its third quarter (Q3) revenue to be between $3.7 billion and $4.1 billion, indicating a remarkable year-over-year growth of approximately 189% to 220%. Further, for the full year, Super Micro computer projects revenue to arrive in the range of $14.3 billion to $14.7 billion, showcasing a notable year-over-year growth of about 101% to 106%.
The Bear Case for SMCI Stock
While the company benefits from robust demand, its adjusted gross margin has consistently trended lower for the past several quarters. For example, in the second quarter of the current fiscal year, Super Micro Computer’s adjusted gross margin was 15.5%, marking a decrease of 150 basis points from the previous quarter and 330 basis points from the same period last year.
Moreover, the company’s success depends upon its ability to rapidly introduce new products, which allows it to capitalize on technology transitions. However, this increases research and development expenses, putting pressure on its margins. Additionally, with competition intensifying in the sector, the company could experience pressure on pricing, which could further squeeze margins.
Besides concerns related to its margins, the massive rally suggests that many positives are already reflected in its share price. Super Micro Computer stock is trading at a trailing 12-month price-to-earnings multiple of 91.32, which appears expensive and could limit the upside potential.
What's the Bottom Line on Super Micro Stock?
Super Micro Computer presents an attractive investment opportunity for investors planning to capitalize on the rapidly growing AI infrastructure market. With strong demand, its focus on product launches, and expansion of manufacturing capacity, Super Micro Computer will likely deliver significant growth in the coming quarters.
However, the stock’s substantial rise suggests its positives may already be factored into the price. Consequently, investors may consider waiting for a pullback before buying SMCI stock.
Among the 10 analysts covering the shares, six recommend “Strong Buy.” Three analysts have a “Hold” rating, and one maintains a “Strong Sell.” The Street-high price target for SMCI stock is $1,300, indicating about a 14% potential upside for the shares. Meanwhile, the average price target of $742.22 implies about 35% downside potential.
