The S&P500 (SNPINDEX: ^GSPC) is the most popular benchmark for the US stock market. The index includes 500 large-cap companies, currently defined as companies with a value of at least $18 billion, and covers approximately 80% of domestic equities as measured by market capitalization. To qualify for inclusion, a company must also be profitable and its shares must be sufficiently liquid.
Super microcomputer (NASDAQ: SMCI) became the newest artificial intelligence (AI) company to join the S&P 500 when it joined the index in March 2024, just over a year after joining the index. S&P MidCap 400 in December 2022. Meanwhile, shares rose more than 1,700% over the past two years as strong demand for AI computing products fueled rapid sales growth.
The stock still has a consensus rating of “buy” among Wall Street analysts, and the average price target of $965 per share implies an upside of 26% from the current price of $762 per share. Here’s what investors need to know about Supermicro.
Super Micro Computer is gaining share in the AI server market
Super Micro Computer develops accelerated computing platforms, such as storage and servers for enterprise and cloud data centers, purpose-built for use cases such as 5G and artificial intelligence (AI) applications. The platforms integrate the latest chips, memory and storage solutions from vendors such as Advanced micro devices, IntelAnd Nvidiaso that Supermicro offers customers a high degree of flexibility in customizing their computer products.
In addition, the company has a unique building block approach to product development. It can typically integrate the latest technologies into its servers and bring them to market before other manufacturers. On the recent earnings call, CEO Charles Liang told analysts, “We provide optimized AI solutions at scale, which deliver a time-to-market advantage and shorter lead times versus our competition.”
Analysts at bank of America believe competitive advantage will increase market share in artificial intelligence servers, such that Supermicro will account for 17% of sales in 2026, up from 10% in 2023.
Jim Kelleher of Argus is also bullish. “We believe Supermicro has an advantage over legacy server vendors and is the preferred partner of Nvidia and other industry leaders for AI implementations,” he wrote in a note to customers. “Supermicro is emerging as a go-to provider for data center deployment of GPU computing infrastructure used in training large language models (LLMs), inference, deep learning and other elements that enable generative AI applications.”
Super Micro Computer suffered a minor setback in the third quarter
Supermicro shares tumbled 15% when the company reported third-quarter financial results that missed top-line expectations, but investors may have overreacted. Revenue rose 200% to $3.8 billion during the quarter, just shy of the 209% growth Wall Street had expected. However, non-GAAP net income still rose 308% to $6.65 per diluted share, easily exceeding the 255% growth that analysts had forecast.
In terms of light revenue, Supermicro would have shipped more products if supply had not been limited, CEO Charles Liang said. Management reported record demand for liquid-cooled, full-rack AI systems, and the company was the first to market with Nvidia’s new Grace Blackwell GB200 processors, which pair one Grace CPU and two Blackwell GPUs.
Additionally, Supermicro actually raised its full-year revenue outlook. Guidance around the midpoint now implies 110% revenue growth in fiscal 2024, which ends June 30. The company previously forecast revenue growth of 104%, and Wall Street had forecast revenue growth of 106%. In short, Supermicro sees itself on a higher growth trajectory than before the third quarter, so the recent pullback looks like a buying opportunity.
Super Micro Computer stock is trading at a surprisingly reasonable valuation
The AI server market is forecast to grow 47% annually between 2023 and 2028. JPMorgan Chase. Supermicro is well positioned to benefit from that tailwind. Wall Street expects the company to grow earnings per share 49% annually over the next three to five years.
That consensus estimate makes the current valuation of 42.7 times earnings seem very reasonable. I say this because the price-to-earnings-growth ratio (PEG), which compares the price-to-earnings ratio to expected earnings growth, is currently below 1. For context, Nvidia currently has a PEG ratio of 2. And Amazon And Microsoft have PEG ratios of 2.2 and 2.5 respectively.
Of course, shares could fall if the company’s earnings growth is slower than Wall Street expects. But patient investors comfortable with that risk should consider buying a small position in Supermicro, the newest AI stock in the S&P 500.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Amazon and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Bank of America, JPMorgan Chase, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short January 2026 $405 calls to Microsoft, and short May 2024 $47 calls to Intel. The Motley Fool has a disclosure policy.
Meet the newest artificial intelligence (AI) stock to join the S&P 500. It rose 1,700% in two years, and Wall Street says the stock is still a buy. originally published by The Motley Fool
