Where Will Super Micro’s Rising Stocks Be in 5 Years?

By | February 27, 2024

With shares up more than 700% in the past twelve months, Super microcomputer (NASDAQ: SMCI) was one of the biggest beneficiaries of the artificial intelligence (AI) tree, even faster than giants included Nvidia, which rose 230% over the same period. While the company doesn’t design and manufacture its AI chips, it does help turn these items into turnkey computers and servers for its data center customers.

But as Super Micro’s business booms, has Super Micro’s explosive rally put the stock out of the reach of value-conscious investors? Let’s dig deeper to find out if this stock is still a good long-term buy.

Why is Super Micro booming?

Historically, Super Micro has been a relatively cheap company. At the start of 2023, shares were worth just under ten times earnings, marking a dramatic discount to the economy. S&P500 average around 27.

The discount likely had a lot to do with Super Micro’s business model. Unlike many of the largest technology companies, it does not specialize in software, which tends to command higher valuations due to its high margins and scalability. The company also does not design and produce expensive chips like Nvidia or AMD Doing. Instead, these advanced products are turned into computer servers that data center customers use to run websites, AI algorithms, and other applications.

Super Micro is benefiting from rising demand for AI-related data center hardware. Fiscal second-quarter revenue rose 103% year over year to $3.66 billion, while net profit rose a much more modest 68% to $296 million. But it is unclear how much steam the rally still has.

Can Super Micro’s rally continue?

Some analysts are still bullish on Super Micro, with Rosenblatt securities giving it a 12-month price target of $1,300, a potential upside of 81% based on expected increases in AI-related demand. But there are some reasons why investors may want to remain cautious.

For starters, Super Micro doesn’t have particularly deep depth economic moat. According to the Financial timesmany of the largest data center operators, including Amazon, MicrosoftAnd Alphabet, can build their own computer servers. This means that Super Micro’s products have limited pricing power and inelasticity of demand. In other words, if server prices become too high, consumers may look for alternatives.

And unlike Nvidia, which saw its gross margin increase year over year from 54% to 74% in the third quarter, Super Micro’s explosive revenue growth isn’t improving its pricing power.

Nervous man looks at his stock charts

Image source: Getty Images.

The server maker’s gross margin fell from 18.7% to 15.4% in its most recent earnings report. And as supplies from chip makers like Nvidia become more expensive, it may be difficult for Super Micro to pass all these costs on to end users, leading to continued margin weakness.

What could the next five years have in store?

After the rocket rally, Super Micro Computer now has a price-earnings ratio (P/E) ratio of about 62, which is a significant premium over both the S&P500‘S average of 27 and Nvidia, which trades at just 34 times its forward earnings. These numbers suggest that Super Micro is overvalued.

Nvidia’s stronger economic position and higher margins mean that its bottom line is likely to grow much faster than the smaller alternative.

Over the next five years, Super Micro can continue to beat the market simply based on the momentum of the fast-growing AI industry. But right now, the stock is priced for perfection. And it will have to justify its valuation, otherwise it will suffer a correction. Investors may want to take profits or wait to buy shares until more information becomes available.

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

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Super Micro Computer and recommends the following options: long January 2026 $395 calls at Microsoft and short January 2026 $405 calls at Microsoft. The Motley Fool has a disclosure policy.

Where Will Super Micro’s Rising Stocks Be in 5 Years? was originally published by The Motley Fool

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