Despite these impressive gains, many on Wall Street believe there is more upside potential ahead. Let’s take a look at Supermicro’s competitive advantages, the challenges it faces, and whether or not it’s a buy.
Supermicro has a track record of creating custom servers dating back 30 years, so when the need for solutions focused on the unique demands of generative AI exploded onto the scene, the company was there to answer the call. The secret of Supermicro’s success is its modular building clock architecture. By manufacturing these components separately, the company can offer a wide range of servers and storage systems tailored to the specific needs of each customer, from build-to-suit to plug-and-play rack-scale systems. Supermicro also offers support to help customers install, upgrade and maintain their computing infrastructure.
Another advantage is the company’s strong relationships with the industry’s most sought-after chipmakers. This ensures that Supermicro has access to a steady supply of the most advanced semiconductors to power its systems. Moreover, energy efficiency is in the spotlight, the result of energy-hungry AI solutions. Supermicro’s long history of focus on energy efficiency quickly caught the industry’s attention.
The past year was one for the record books for Supermicro. For fiscal year 2024 (ending June 30), revenues rose 109% year over year to a record $14.9 billion. At the same time, earnings per share (EPS) rose 76% to $20.09. Management said it continues to see “record demand” as sales have grown five times faster than the industry average over the past 12 months, illustrating Supermicro taking market share from its rivals. CEO Charles Liang suggested that the company has an estimated 80% of the direct liquid cooling (DLC) server market for AI.
The company is experiencing growing pains, as evidenced by declining margins, although management attributes these to the product mix and a bottleneck related to certain components. On the plus side, the $800 million in impacted revenue has not been lost, but rather pushed to the current quarter.
CFO David Weigand said, “We have a path to improve gross margins to the targeted range of 14% to 17%,” citing improving production efficiencies. The company also expects to increase profit margins when new manufacturing facilities come online later this year, which should also increase production capacity to support annual sales of $50 billion.
That doesn’t mean there are no risks. Supermicro was the target of a brief attack by Hindenburg Research, which alleged accounting irregularities without providing much evidence. Supermicro then fanned the flames when it announced that its annual report would be filed late. As if that wasn’t enough, reports emerged that the Department of Justice (DOJ) had opened an investigation following the brief report.
If the company can overcome these challenges, there’s a good chance the stock will continue its relentless rise.
In light of these dark clouds, you might think that Wall Street would abandon Supermicro en masse, but that is simply not the case. Of the seventeen analysts who covered the stock in September, seven rated it a buy or strong buy, and none recommended selling. Furthermore, a average The price target of around $77 suggests there is still 62% upside potential compared to Supermicro’s closing price on Friday.
Loop Capital analyst Ananda Baruah remains the top Supermicro bull on Wall Street, with a buy rating and a Street-high, split-adjusted price target of $100. That indicates a potential gain for investors of 111% compared to Monday’s closing price. The analyst believes that Supermicro leadership was likely already aware of the DOJ investigation and is cooperating with regulators. Baruah further said the company can more than double revenue to $40 billion in the coming years, which should fuel an increase in its stock price.
For those willing to take on some extra risk, Supermicro offers a compelling value proposition. It currently sells for 23 times earnings and less than twice sales – the definition of an underpriced stock.
Supermicro’s industry leading position, good tailwinds and attractive price combine to create an attractive opportunity for savvy investors.
Consider the following before buying shares in Super Micro Computer:
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Danny Vena holds positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Meet the newest stock to join the S&P 500. It’s up 1,780% over the past decade and is still a buy right now, according to a Wall Street analyst. Originally published by The Motley Fool
