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The artificial intelligence (AI) revolution continues to defy all skepticism, and the industry received a big boost earlier this month when its best-known representative, Nvidia (NVDA), reported yet another set of impressive quarterly results. Given its positioning at the heart of AI tech, many market-watchers took Nvidia's blowout results to mean that there's more upside in store not just for chip specialists, but for the storage and data management services providers that house and cool their AI supercomputers, too.
According to industry forecasts, the AI server market is forecast to reach a market size of $177.4 billion by 2032, clocking a CAGR of 18% between 2024 and 2032. Further, IDC stats suggest that data center storage capacity is expected to grow at a CAGR of 18.5% from 10.1 zettabytes (ZB) in 2023 to 21.0 ZB in 2027, fueled largely by AI.
One standout stock that's particularly well-positioned to benefit from the growth in this niche is Super Micro Computer (SMCI), which was reiterated at “Buy” in a note from Bank of America analyst Ruplu Bhattacharya after the latest earnings report from Nvidia. Here's why.
About Super Micro Computer Stock
Founded in 1993, Super Micro Computer (SMCI) designs, develops, manufactures and markets high-performance, high-efficiency server and storage technology for various applications in the data center, cloud, enterprise IT, scientific computing, and embedded markets. Notably, the San Jose-based company is one of the largest producers of high-performance and high-efficiency servers.
Commanding a market cap of $49.44 billion, SMCI stock has rocketed by a whopping 207.4% on a YTD basis. Longer term, the shares are up 4,552% in the past five years.
Fundamentally Robust & Consistently Strong Results
Super Micro has grown rapidly over the years, as evidenced by its recent addition to the S&P 500 Index ($SPX). While its revenues have clocked a CAGR of 24.13% over the past 10 years, EPS has recorded a CAGR of 36.70% over the same period.
In Q3 of 2024, Super Micro reported net sales of $3.85 billion, more than triple the previous year's revenue of $1.28 billion. Adjusted EPS jumped 329% over the same period to $6.65, comfortably outpacing the consensus estimate of $5.75. Notably, barring one instance, Super Micro's EPS have topped expectations in each of the past five quarters.
SMCI closed the quarter with a cash and equivalents balance of $2.11 billion, well above its short-term and long-term debt levels of $81.56 million and $85.65 million, respectively.
For the fiscal year ending in June 2024, the company raised its revenue guidance to a range of $14.7 billion to $15.1 billion.
Super Micro's Competitive Edge
Super Micro's growth over the years is a testament to its capability to customize its server offerings according to its customers' needs. This gives Super Micro a competitive advantage, as the complexity of putting together many different components in a configuration for a specific application under time constraints is high enough to limit competition.
The company can do this because of its modular approach, which involves the use of pre-designed, compatible components that can be easily mixed and matched to create custom configurations using the latest technology. This results in rapid turnaround times, from first receiving the order to delivering the final product.
Super Micro's strong relationships with key Silicon Valley component manufacturers provides a significant advantage. They collaborate closely with industry leaders like Nvidia to integrate cutting-edge AI chipsets, such as the recently announced Nvidia GH200 Grace Hopper superchips, into their server solutions. This positions Super Micro for early market entry with these powerful new technologies. Furthermore, Super Micro partners with other HPC leaders like AMD (AMD) and Intel (INTC), ensuring compatibility with a wide range of AI accelerators.
SMCI's sustainable growth efforts also bode well for the future. It was one of the first companies to use liquid cooling in servers, which it promotes as a green computing initiative. For the same computing power, liquid-cooling servers take up less space than air-cooled servers, reducing the real estate footprint of the servers and effectively reducing capex if the customer owns the land containing the data center facility.
Super Micro is a leader in direct liquid cooling technology for data centers, and Bank of America projects the company is on pace to reach a production capacity of 2,000 directly liquid-cooled server racks per month by June's end. Super Micro anticipates rapid adoption of its liquid cooling technology, with market penetration potentially reaching 20% within the next several years. Given the current low adoption rate of just 1%, this presents a significant opportunity for Super Micro to capture market share and solidify its leadership position.
How SMCI Benefits From AI Expansion
Super Micro operates in a market that is poised for a massive boom in the coming years, thanks to AI. Although Super Micro's overall market share is smaller compared to its larger peers like HP (HPE) and Dell (DELL), it invests more in R&D as a part of its revenues (4%-6%) than its bigger competitors, who are closer to 2-5%.
Coupled with its AI expertise and speed to market, that should help SMCI build its market share as the industry expands. As a relatively small but rapidly growing pure-play provider in the burgeoning data center market, Super Micro is expected to emerge as a key beneficiary of this megatrend.
Moreover, Super Micro management has said that it sees sovereign AI - the use of AI by governments and public entities - as a potential future growth driver not fully reflected in current market projections. CFO David Weigand recently highlighted increasing investments in AI from “both sovereigns as well as other enterprises in EMEA, as well as Europe,” suggesting a coming wave of demand over the next year. This trend could fuel significant growth for Super Micro in the AI server market.
What's the Growth Forecast For SMCI?
Looking ahead, Super Micro's growth forecasts are strong. Analysts are expecting the company's forward revenue growth around 65.71%, compared to the tech sector median of 6.51%. Likewise, operating profit and EPS growth are pegged at 88.79% and 82.70%, towering over the sector medians of 6.09% and 7.01%, respectively.
Overall, earnings are estimated to grow 122.5% in the current fourth quarter, ending in June, and 94.38% in FY 2024.
Analysts Say SMCI Stock Is A Buy
Analysts are optimistic about Super Micro stock, rating it a “Moderate Buy” overall with a mean target price of $980.73. This indicates an upside potential of about 12% from current levels.
Out of 12 analysts covering the stock, 8 have a “Strong Buy” rating, 4 have a “Hold” rating, and 1 has a “Strong Sell” rating.
Along with the opportunity in liquid cooling, BofA summed up the bull case for SMCI following Nvidia's earnings report, saying that Super Micro is "well positioned with tier-2 [cloud service providers] like CoreWeave who are seeing strong demand and are expanding globally; has pockets of strength in enterprise in specific verticals like financial services, drug discovery and autonomous vehicles, and is investing to expand its sales, marketing and customer engineering teams; and is in early discussions with sovereign entities who are looking for a partner who can customize their AI setup to maximize performance from the hardware, while providing attractive price/performance."
The brokerage firm has a $1,090 price target for SMCI, indicating expected upside of 24.6% from here.
On the date of publication, Pathikrit Bose 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.
