4 Reasons to Buy Super Micro Computer Stock Like There's No Tomorrow
Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, has become a fan-favorite for artificial intelligence (AI) investors over the past year or so. Since Jan. 2023, the stock has surged 1,290%.
The company supplies high-end, energy-efficient servers designed to enable high-performance computing, hyperscale data centers, and AI. The advent of generative AI has resulted in accelerating demand as businesses race to profit from this paradigm shift. This, in turn, has translated into surging financial results and a skyrocketing share price for Supermicro.
Now that the stage is set, let's look at four reasons to buy Supermicro stock like there's no tomorrow.
1. Supermicro has gone parabolic over the past year, and growth is expected to accelerate
Supermicro has long been a key player in the server market, but its growth over the past year has been unprecedented.
A quick review of Supermicro's recent results paints a compelling picture. For the company's fiscal 2024 second quarter (ended Dec. 31), it generated record revenue that soared 103% year over year to $3.7 billion. At the same time, diluted earnings per share (EPS) surged 85% to $5.10.
If that weren't enough, management suggests demand will continue to accelerate. Supermicro is guiding for third-quarter revenue of $3.9 billion at the midpoint of its outlook, which would represent year-over-year growth of 205% -- and that could end up being conservative if history is any guide.
2. Supermicro will benefit from a significant upgrade cycle
The advent of AI sparked the beginning of a massive data center upgrade cycle. Existing data center servers aren't equipped with the computational horsepower necessary to withstand the rigors of AI. Fearing they will be left behind, data center operators are spending at a breakneck pace to increase the capabilities of their operations.
Estimates suggest this will result in more than $1 trillion in upgrades over the next several years. As one of the leading providers of AI-centric servers, Supermicro is well positioned to ride these secular tailwinds higher.
Furthermore, Bank of America analyst Ruplu Bhattacharya suggests that demand for AI servers will be much greater in the coming years than many believe. He believes this demand will grow at a compound annual rate of 50% over the next three years, while Supermicro's revenue could "grow even faster."
3. Supermicro is stealing market share from its rivals
Even as overall demand for AI-centric servers is increasing, Supermicro is stealing share from the incumbents. Late last year, Barclays analyst George Wang noted that Supermicro's "superior design capability and strong AI partnerships" would help drive market share gains. "[Supermicro] has 7% market share globally, implying further share gains ahead are likely," Wang said. He further suggested the company is taking share from larger competitors, including Dell Technologies and Hewlett Packard Enterprise.
Rosenblatt analyst Hans Mosesmann sees that trend accelerating too. "We expect Supermicro to achieve significant market share gains, potentially reaching double digits in the next few years from its current mid-single digits with a special emphasis on enterprise solutions," he wrote in a note to clients.
4. Supermicro has a surprisingly affordable valuation
Excitement about the potential represented by AI has investors flocking to AI stocks, which has driven valuations on many popular companies higher than they've been in years. Supermicro hasn't been immune to this phenomenon, but the stock is still surprisingly cheap.
The stock is currently selling for about 3 times next year's sales (fiscal 2025). While that looks relatively inexpensive, even that figure doesn't take into account the company's surging profits. Using the price/earnings-to-growth (PEG) ratio shows a valuation of less than 1 -- the standard for an undervalued stock.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Super Micro Computer. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
4 Reasons to Buy Super Micro Computer Stock Like There's No Tomorrow was originally published by The Motley Fool
