If you invest $1,000 Super microcomputer (NASDAQ:SMCI) five years ago you would have €37,000 today – an eye-watering return of 3,700%. Companies like these demonstrate the potentially life-changing consequences of long-term investing.
But past performance does not necessarily guarantee future results. Let’s dig deeper to find out if Super Micro can continue to deliver market-beating growth over the next half decade.
Why a super microcomputer?
Founded in 1993, Super Micro Computer is a technology company specializing in energy-efficient computer servers and data center equipment. It’s not the flashiest company. But as a provider of picks for other enterprises, it has enjoyed significant spillover benefits from technology megatrends like cloud computing and 5G connectivity, boosting demand for its hardware.
Launching OpenAI’s ChatGPT in late 2022 and beyond generative artificial intelligence (AI) boom was Super Micro’s big breakthrough. Part of Super Micro’s business involves turning Nvidia’s graphics processing units (GPUs) into turnkey computer servers for customers, so rising demand for Nvidia hardware also boosted its business. These positive trends continued in the third quarter.
Super Micro sales increased by approximately 200% year after year to $3.85 billion, while net profit skyrocketed from $86 million to $402 million, largely based on AI-related question.
Analysts are confident that the AI industry’s momentum will continue in the near term, with Barclays expecting national AI projects in East Asia and the Middle East to drive additional demand for data center hardware. Super micro is also diversifying its supply chain by building servers using GPUs developed by Nvidia’s rival Advanced micro devicesthus reducing over-reliance on one chipmaker.
The company is not without it challenges
From an operational perspective, Super Micro’s future looks bright. But the business is not without risks. Enterprise customers have already poured billions into generative AI hardware, and it’s unclear how much more they can spend before shareholders back off.
According to The WashingtonPostAI chatbots like ChatGPT lose money on every search because of their extremely high operating and training costs. And the growing popularity of free, open source major language models (LLMs) like Elon Musk’s Grok or Meta‘s LLaMA could undermine the industry’s profit potential by introducing more competition.
Right now, most of the money is in AI made by selling supporting hardware rather than developing consumer-oriented software. This is a classic California Gold Rush scenario in which the pick and shovel sellers outperformed the actual gold diggers. But if the prospectors pack up and go home, the equipment suppliers will lose their customers.
Super Micro faces an additional threat of competition in the server market. Although the company benefits from the rising demand for AI chips, it does not design or produce the chips itself. This means that the economic position is somewhat weak. And it will face competition from other server makers such as Dell Technologies or Hewlett Packard Enterprisewhich also use Nvidia chips to develop servers for AI-related workloads.
Is Super Micro Stock a Buy?
While it’s uncomfortable buying a stock that has already risen so quickly, Super Micro still seems like a decent investment. Granted, the company faces a somewhat shallow economic moat and the distinct risk that the AI industry will not live up to expectations. But with an advantage price-earnings ratio (P/E) multiple of just 22, the market appears to have already priced in most of the potential downside.
While Super Micro’s shares are unlikely to rise another 3,900% in the next five years, there is healthy operational growth. in combination with a reasonable valuation it seems likely that it will outperform the market.
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Randi Zuckerberg, a former market development director and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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 Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
Where will supermicrocomputer stocks be in five years? was originally published by The Motley Fool
