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Super Micro Computer (NASDAQ:SMCI ), the top-performing S&P 500 stock of the first half, has seen a remarkable year-to-date surge. At the time of writing, SMCI stock is up 90% since the beginning of the year. Impressively, that's despite a sharp decline of more than 55% from the stock's peak seen earlier this year. In other words, from the beginning of this year to the stock's peak, Super Micro investors were at one point up more than 330%.
Given the incredibly high volatility we've seen with Super Micro's valuation, one thing is for certain - there's a wide range of investor opinions on this stock. Some believe that the company's recent earnings , which fell short of Wall Street forecasts as margins came in lighter than expected, are a sign of slowing fundamental growth. Other bulls suggest that the company's surging market share in the direct liquid cooling server market (from 1% last year to around 15% currently) speaks to a longer-term secular trend worth exploring. And with Super Micro remaining the top player in this space, it's hard to disagree with the fact that there are strong tailwinds ahead.
That said, at the end of the day, even the best companies can be overvalued from time to time. Let's try to gauge whether the company's recent earnings miss is something to be overly concerned about, or if SMCI stock is a screaming buy at current levels.
Key Points About This Article:
- Super Micro's recent earnings spooked many investors, with the stock continuing its decline from its March peak, down 55% over this time.
- That said, the stock is still up 90% this year, as investors continue to consider the company's long-term growth potential in the direct-cooled server market.
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Second Quarter Earnings
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Super Micro’s Q4 2024 earnings report saw the company bring in net revenue of $5.31 billion, up 143% year-over-year. This solid top-line growth number came despite delays and a shortage of DLC liquid cooling components. The company’s EPS rose 78% from the previous year, and although operating margins were lower than expected at 7.8%, Supermicro's inclusion in the NASDAQ 100 and its advances in DLC liquid cooling could boost future profitability. The company anticipates strong demand for its cooling solutions, which promise cost-effective, high-performance, and eco-friendly options for datacenters.
The company has delivered more than 1,000 DLC racks this past quarter, aiming to make liquid cooling the standard for datacenters and AI factories. Impressively, Super Micro now expects 25-30% of new global datacenter deployments to adopt DLC solutions within a year. That's up from current market share levels of around 15% (the number was closer to 1% last year). DLC cooling technology promises to reduce customers' energy costs by up to 40%, enhance performance, reduce lead times, and lower carbon footprints. Given the rise in energy prices we've seen, this is a big deal. Supermicro’s upcoming 4.0 Datacenter Building Block Solutions will also shorten datacenter build times from three years to two.
Supermicro's Datacenter BBS is set to optimize smaller or renovated datacenters in as little as six months. This solution integrates AI compute, servers, storage, networking, and more, enhancing speed and cost efficiency. Launching later this year, it will be supported by a new Malaysia campus starting production in November, boosting shipping and cost efficiency. Additional facilities near Silicon Valley and other global locations will expand production capacity. With high backorders and strategic investments, Supermicro is positioned for long-term growth despite short-term profitability impacts.
What's Super Micro's Outlook?
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Despite challenges in increasing margins, the company managed to control operating expenses and report EBIT growth this past quarter. Analysts have raised the company's EPS estimates , suggesting significant potential for better-than-expected results. Wall Street thinks SMCI stock could surge more than 72% by 2025, driven by a revenue increase of more than 60% this year. By 2029, the company could reach a $24.1 billion revenue, making this stock one that's relatively fairly valued at current levels (right around that sales number on a market capitalization basis currently).
Super Micro now forecasts September quarter revenue will come in between $6 billion and $7 billion, with fiscal 2025 revenue expected between $26 billion and $30 billion. Short-term margin pressures are anticipated to ease as high-volume shipments of DLC liquid cooling and Datacenter Building Block Solutions ramp up later this year. Additionally, Supermicro announced a 10-for-1 stock split, effective October 1, 2024, to increase stock accessibility. These factors combine do appear to position the stock well, consider it's trading at around 15-times forward earnings at the time of writing, after its recent spike higher.
The Verdict
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Despite strong recent gains, Super Micro Computer faces potential challenges. Its trailing P/E ratio of 34x suggests the stock may be overpriced, limiting future price appreciation. The increase in shares outstanding—up 9.24% year-over-year and 5.77% quarterly—could lead to shareholder dilution. Additionally, the company's negative cash flow of $1.97 billion and ongoing need for capital may further strain investors, requiring significant gains just to break even.
That said, on a forward-looking basis, the stock is a lot cheaper. Trading around 15-times earnings right now (and roughly 1-times forward 2029 sales), this isn't an overly expensive stock for investors looking to hold for the next five years or so. Of course, a lot needs to go right for Super Micro to realize the valuation many in the market are willing to put on the stock today, and it's down considerably from its peak.
But so long as AI server demand remains strong, direct liquid cooling technology really could be the next big thing. Reducing energy costs and improving efficiency is the name of the game right now, and we're going to need more of this on the infrastructure side. Accordingly, this is a stock I think is worth owning at current levels.
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