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Is Super Micro Computer Stock a Buy?

Vaseline 4 weeks ago

The stock’s valuation may shock you after moving 1,000% higher.

Companies’ rush to capture market share in artificial intelligence (AI) has led to a surge in demand for the hardware that powers these powerful models and applications. Super microcomputer (SMCI -23.14%) has been a major benefactor, and the stock’s exponential rise over the past year reflects that.

After rising from less than $100 to more than $1,200 per share, the stock – and the broader market – has taken a breather in recent weeks.

Extreme price action can deter investors from buying a dip because they fear that the higher a stock rises, the further it will fall. But in this case, that could be an unfounded fear. This is why Supermicro, as it is also known, could be a brilliant buy today.

The numbers support Super Micro Computer’s rapid run

It’s hard to find a stock’s price chart so impressive; It can take decades for most stocks to achieve gains of more than 1,000%, so achieving such a milestone in less than 18 months is remarkable – and rare. Artificial intelligence is the main catalyst for this. According to some studies, the long-term potential of AI is enormous… a future multi-billion dollar industry. Investors are doing their utmost to tailor their portfolios to that growth.

Supermicro sells modular server systems and components for data centers. This is an ample opportunity because most companies don’t want to design these massive computer systems from the ground up; they want fast, off-the-shelf computing power, which is in Supermicro’s wheelhouse.

SMCI chart

SMCI data by YCharts

Stock prices can often react to expectations of what might happen, and the huge AI potential could justify some stock gains. Fortunately, hard numbers are already supporting Supermicro’s rising stock price. The company has entered a growth spurt with revenue growing 103% year-over-year and 73% quarter-over-quarter in the second quarter of fiscal 2024. Management believes in that growth accelerateswhich is indicative of over 200% year-on-year growth for the coming quarter.

Analysts believe the company will earn about $22.15 per share this fiscal year, valuing the stock at a forward price-to-earnings ratio of 43, despite its monstrous performance over the past 18 months. In other words, Supermicro has already become the big shoes that the market thinks it should own.

Looking to the future

Investing is about looking to the future, and you may need sunglasses to see Wall Street’s positive expectations for this company. Analysts believe Supermicro will grow earnings at an average annual rate of 50% over the next three to five years.

That’s a high bar, but one that Supermicro seems capable of exceeding. After all, turnover is growing by three figures. The company is already profitable, so most of that should trickle down to the bottom line. It does not even take into account additional growth-enhancing measures such as share buybacks that management could deploy if the cash balance increases.

SMCI EPS LT growth estimates chart

SMCI EPS LT Growth estimates data based on YCharts

How likely is this to happen? Research shows that AI uses enormous computing power, naturally driving demand for more data centers. This is evident from an American data center market report from New brandwill double the data center footprint in America by 2030 due to demand for AI applications. Supermicro has noted that demand for its systems is growing faster than the broader industry, which bodes well for growth over the next five years.

Is Super Micro Computer a purchase?

Given the huge price movements, you might assume that Supermicro is expensive, but the numbers show that this is not true. Using the PEG ratio to value stocks based on expected growth illustrates this. I generally look for PEG ratios of 1.5 or less, and Supermicro’s PEG ratio is currently just 0.8. Assuming Supermicro lives up to analyst expectations, the stock is a bargain for long-term investors today and an easy buy.

What if the company’s performance does not meet expectations? Suppose actual long-term earnings growth is half of estimates, just 25% annualized. The resulting PEG ratio of 1.7 would still be somewhat reasonable for buyers today. That means Supermicro would probably have to fall flat if it didn’t generate satisfactory investment returns over the long term.

Investing offers no promises, but you can increase your chances of success by finding situations where the reward outweighs the risks involved. The numbers show that Supermicro is one such opportunity.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.