Is Super Micro Computer Stock a Buy?

Investing in the stock market can be daunting, especially with technology stocks that exhibit volatility and rapid growth. One such company that has piqued the interest of investors is Super Micro Computer, Inc. (NASDAQ: SMCI). But the question remains: is Super Micro Computer stock a buy? This article will delve into the various aspects of the company, from its financial performance to market position, to help you make an informed decision.

Overview of Super Micro Computer Stock

Shares of Super Micro Computer (SMCI) have experienced a roller coaster ride this year. The AI server manufacturer's stock soared over 300% in less than three months at the beginning of 2024 but has since declined by 29% after reaching an all-time high in the first half of March.

However, Supermicro stock appears to be regaining momentum, rising over 12% on June 13. This surge was fueled by the latest earnings reports from major artificial intelligence (AI) players such as Broadcom and Oracle. Broadcom raised its forecast for AI chip sales for the current fiscal year, while Oracle highlighted its expansion of cloud computing capacity to meet the massive demand it's experiencing.

Reasons Behind Super Micro Computer Surge

These developments are promising for Supermicro, whose AI servers are integral to mounting chips used for training and deploying AI models in data centers. Despite the recent surge, the stock has nearly tripled in 2024. So, is it too late for investors to buy Supermicro stock? Let's explore.

Supermicro's Impressive Financial Performance

Supermicro stock is currently trading at 4.3 times sales, significantly lower than the U.S. technology sector's average of 7.8. This suggests the stock might be undervalued. A major reason for Supermicro's attractive price-to-sales ratio is that its share price gains have been supported by impressive revenue growth.

Specifically, Supermicro's fiscal 2024 Q3 revenue tripled year over year to $3.85 billion. Additionally, the company has increased its fiscal 2024 revenue guidance to $14.9 billion, up from the previous expectation of $14.5 billion (both figures at the midpoint of their respective ranges). This updated guidance indicates that Supermicro's top line is on track to more than double from the previous fiscal year. Moreover, the company's robust sales growth is translating into substantial earnings improvement. Its bottom line grew fourfold in the previous quarter to $6.65 per share.

Currently, Supermicro sports an earnings multiple of 43, slightly below the U.S. tech sector's average price-to-earnings (P/E) ratio of 45. However, its forward earnings multiple of 21 suggests that its bottom-line growth is poised to accelerate.

Increased investment in AI infrastructure will be a major driving force

The latest earnings reports from Oracle and Broadcom indicate that AI infrastructure spending is growing at an impressive pace. Oracle, for example, is "working as quickly as we can to get cloud capacity built out given the enormity of our backlog and pipeline." Meanwhile, Broadcom highlighted that hyperscale cloud computing providers are "accelerating their investments" to enhance the performance of their data centers.

This surge in spending is why the AI server market is projected to expand from $31 billion in 2023 to an astounding $430 billion by 2033, reflecting a compound annual growth rate (CAGR) of 30%. Supermicro is outpacing the overall AI server market growth, indicating it is the preferred choice for data center operators deploying AI servers.

Supermicro's strategy of rapidly producing cost-efficient server solutions for popular AI chips from leading chipmakers is crucial in helping it capture a larger share of the AI server market. Additionally, the company's emphasis on quickly increasing production capacity allows it to make significant inroads in this space.

All these factors suggest that shares of Supermicro could continue to rise in the long run. The AI stock has a median 12-month price target of $1,030 per share among 20 analysts, representing a 22% gain from current levels.

Should I Buy Super Micro Computer Stock Now?

Given the strong revenue growth, positive analyst outlook, and competitive advantages, Super Micro Computer stock appears to be a compelling buy for investors bullish on the AI boom. Supermicro's impressive financial performance, strategic positioning in the rapidly growing AI server market, and robust demand for its products underscore its potential for sustained growth.

However, potential investors should also consider the recent volatility and technical analysis indicators before making a decision. The stock has experienced significant price fluctuations, which may not be suitable for all investors.

Recommendation: Buy if you are bullish on AI and can tolerate some volatility.