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The Next Nvidia? Why Supermicro Could Explode in a Chip-Hungry World

Last Updated February 13, 2024 11:05 AM
Giuseppe Ciccomascolo
Last Updated February 13, 2024 11:05 AM

Key Takeaways

  • Supermicro has seen significant stock price growth due to its strong performance in the artificial intelligence server market.
  • It caters to major tech players like Meta and Amazon with innovative data center solutions.
  • Analysts are bullish on Supermicro’s long-term prospects due to the booming AI market.
  • However, there are uncertainties and potential risks, including competition from Dell and HP.

Super Micro Computer , once a hidden gem, has exploded onto the scene, fueled by the artificial intelligence (AI) boom. Its stock price has skyrocketed, surpassing rivals and catching the attention of investors and analysts alike.

But is this meteoric rise sustainable, or is Supermicro simply riding the AI wave before crashing back down?

What Makes Supermicro Super?

Back in August, Finimize’s analysts recognized  Super Micro Computers, or Supermicro, as a top-tier AI investment opportunity when its share price hovered around $277. While it saw modest gains in the following months, this year has seen it shoot up, fueled by stellar quarterly results and an exceptional full-year outlook.

With investor enthusiasm for AI at a peak, Supermicro’s shares are now trading around $773, firmly establishing itself alongside Nvidia as a premier stock play in the AI sector.

Supermicro stock price
Supermicro stock price | Credit: Yahoo Finance

Supermicro’s success is deeply intertwined with Nvidia‘s. As Nvidia’s high-performance chips drive AI, Supermicro provides the cutting-edge data centers necessary to harness their power. Known for its customizable solutions, Supermicro caters to heavyweight clients like Meta and Amazon, delivering complex tech solutions including servers, networking, and cloud storage.

Notably, Supermicro employs liquid cooling techniques to manage the temperature of its multi-rack servers, reducing energy consumption in massive data centers. This focus on cost reduction, operational efficiency, and environmental sustainability has given Supermicro a competitive edge over rivals.

Analysts Positive View

By September, research firm IDC ranked  Supermicro as the world’s fourth-largest server provider, surpassing Lenovo. While Dell and Hewlett Packard Enterprise lead the market, Supermicro’s double-digit revenue growth in the high-margin AI server segment positions it as a frontrunner.

In its latest earnings report, Supermicro boasted a staggering $3.66 billion in revenues, a remarkable 133% increase from the previous year, with a projected 2024 sales forecast of at least $14.3 billion – surpassing analysts’ expectations of $11.5 billion.

Analysts estimates on Supermicro
Analysts estimates on Supermicro I Credit: MarketWatch

With AI poised to revolutionize industries, Supermicro is at the forefront of this transformation. Its quarterly revenue of $3.66 billion for December alone exceeded its total revenue for all of 2021.

Looking ahead, Supermicro has ambitious plans, collaborating with leading AI chip suppliers Nvidia, AMD, and Intel on next-generation AI designs. With partnerships spanning Meta, Amazon, Apple, and Tesla, Supermicro could capitalize on the burgeoning AI market and shape the future of technology.

What’s Next For Supermicro?

Successful investing hinges on looking forward, especially in a rapidly evolving industry like tech. Analysts have consistently underestimated  Supermicro’s earnings this year, underscoring the challenges of forecasting in such a dynamic sector. The wide range in earnings estimates for this year and next highlights this uncertainty:

For 2025, the P/E ratio based on the mean EPS estimate of $28.24 puts the stock at a valuation of 23.5 times, given its high price. However, if the highest EPS estimate of $37.97 materializes, the stock trades at a lower P/E ratio of 17.46 times.

Supermicro outlook
Analysts’ expectations for Supermicro I Credit: Bloomberg Terminal

Assessing valuation through a price-to-earnings-to-growth (PEG) ratio provides additional insight. With an EPS growth rate of 31% based on mean estimates for 2024 and a current P/E ratio of 30.7 times, Supermicro’s PEG ratio stands at an attractive 0.99 times. However, projections for June 2026 yield a less favorable PEG ratio of 1.18 times.

The art of investing lies in navigating uncertainties. Bullish EPS estimates for 2025 and 2026 suggest P/E ratios of 17.5 times and 14.5 times, respectively, and a compelling PEG ratio of 0.56 times, indicating potential undervaluation. Conversely, pessimistic views could result in inflated P/E ratios of 30.7 times and 40 times.

Key Risks Ahead

Key risks include potential competition from Dell and Hewlett Packard Enterprise in data centers, which could put pressure on Supermicro’s operating margins. However, given the current shortage in supply and the ongoing expansion of AI data centers globally, demand remains robust.

While analysts remain bullish  on Supermicro’s long-term prospects, with AI data center growth in its infancy, caution is warranted. Dollar-cost averaging – buying a set amount at intervals over the next six months – could mitigate risk and capitalize on potential opportunities, particularly amid market fluctuations.

With the highest Wall Street target price at $700, exercising restraint and avoiding FOMO-driven decisions may prove prudent as the stock approaches this level.

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