This artificial intelligence (AI) company has returned nearly 5,830% in just five years and is on its way to the S&P 500. Is it too late to buy?

By | March 17, 2024

Perhaps the biggest business driving the markets right now is artificial intelligence (AI). It seems like every software developer is eager to cash in on the AI ​​euphoria, and tech stocks are reaping the rewards.

Like the S&P500 And Nasdaq Composite trading at record levels, my eyes were focused on one stock in particular. The best part? It is not in the ‘Magnificent Seven’.

Shares of Supermicrocomputing (NASDAQ: SMCI) have increased by 5,830% in just five years. So far in 2024, they are up more than 300% as of the market close on March 8. Much of the momentum driving the stock right now revolves around the company’s latest milestone: inclusion in the S&P 500.

This company plays an important role in the field of AI. Let’s delve into Super Micro’s business and understand why the stock is going parabolic.

A fantastic run to the top, but…

Super Micro plays a crucial role at the intersection of semiconductors and artificial intelligence (AI). The company designs integrated systems for IT architecture, including storage clusters or server racks.

Given the increasing interest in graphics processing units (GPUs) from, among others Nvidia And Advanced micro devices Supermicro’s services have been in high demand in the background over the past year.

SMCI Sales (Quarterly) ChartSMCI Sales (Quarterly) Chart

Revenues are growing at over 100% annually and AI tailwinds provide encouraging long-term prospects. It’s no wonder one Wall Street analyst calls Supermicro a “stealth Nvidia.”

As with all businesses, there is more to it than just an acceleration in sales – however big that may be at the moment. Let’s look at some other factors to tighten up the entire investment thesis here.

…there are still some concerns

One of the most important things for investors to understand is that Supermicro is very much a hardware company and its margin profile is much lower than you might think.

For the quarter ended December 31, gross margin was 15.4%. This represented a decrease compared to the previous quarter And same period last year. Management addressed the deterioration in margins during the earnings call, explaining that aggressive investments in new designs and gaining market share were the culprits.

Spending to grow is an argument that only goes so far. In the long term, Supermicro will have to prove that margin expansion and consistent cash flow are achievable.

A photo of server racksA photo of server racks

Image source: Getty Images.

Valuation is becoming increasingly disconnected from fundamental factors

Given the role of semiconductors in the AI ​​revolution, it makes sense that stocks like Nvidia and AMD are attracting attention. However, Supermicro’s close relationship with these chipmakers has created some momentum. This dynamic can pose a lot of risks, as investors may think they are buying the next Nvidia.

But as noted above, Supermicro and Nvidia are very different companies. At best they are tangentially connected. More appropriate comparisons include Hewlett Packard Enterprise, Lenovo, DellAnd IBM. Current share prices trade at a price-to-sales ratio (P/S) of 7, more than double that of IBM.

Not only is Super Micro by far the most expensive stock in this cohort, but the other companies mentioned above have more productive businesses all around. It is a highly specialized operation and not as diverse as, for example, IBM or Dell.

I see it as an interesting way to invest in AI. The company operates in an important sector in the AI ​​landscape, albeit under the radar.

But due to low margins and rising valuations, the premium of shares appears to be less and less dependent on fundamental factors. While inclusion in the S&P 500 is a respectable milestone, it’s not reason enough to chase the stock, even though it could soar in the short term as ETFs and passive funds that mimic the index rebalance their portfolios to capture the new stock to be included in the index.

For now, I would sit on the sidelines and keep an eye on the company’s performance. If Super Micro Computer becomes an influential part of the AI ​​story in the long term, investors will have ample opportunity to buy at more appropriate valuations.

Should You Invest $1,000 in Super Micro Computer Now?

Before you buy shares in Super Micro Computer, consider the following:

The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Super Micro Computer wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor service has more than tripled the return of the S&P 500 since 2002*.

View the 10 stocks

*Stock Advisor returns March 11, 2024

Adam Spatacco has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.

This artificial intelligence (AI) company has returned nearly 5,830% in just five years and is on its way to the S&P 500. Is it too late to buy? was originally published by The Motley Fool

Leave a Reply

Your email address will not be published. Required fields are marked *