Super Micro Computer (NASDAQ: SMCI) , more commonly known as Supermicro, is one the of market's hottest artificial intelligence (AI) stocks. Its shares have rallied 2,290% over the past three years as its sales of AI servers skyrocketed.
Yet Supermicro remains a divisive stock among analysts. Susquehanna's Mehdi Hosseini expects it to drop 60% to $325, while Loop Capital's Ananda Baruah says it can soar 84% to $1,500. Can it really hit that Street-high price target?
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How fast is Supermicro growing?
Supermicro controls a much smaller slice of the traditional server market than Dell Technologies (NYSE: DELL) and Hewlett Packard Enterprise (NYSE: HPE) . However, it carved out its own niche by selling high-performance servers.
That focus made Supermicro an ideal partner for Nvidia (NASDAQ: NVDA) , which initially granted it access to its high-end data center GPUs before its larger competitors. That partnership gave Supermicro a first-mover advantage in AI servers, and the growth of that business accelerated over the past few years as the AI market expanded.
From fiscal 2019 to fiscal 2021 (which ended in June 2021), Supermicro's revenue increased at an anemic compound annual growth rate (CAGR) of less than 1% as it struggled with pandemic-driven disruptions and supply chain constraints. But from fiscal 2021 to fiscal 2023, its revenue rose at a CAGR of 42% as its EPS skyrocketed at a CAGR of 134%.
That acceleration was driven by its brisk sales of dedicated AI servers, which generated about half of its revenue by the end of fiscal 2023. Bank of America estimates Supermicro's share of the AI server market will rise from 10% in 2023 to 17% in 2026 as the entire market expands 150%. Research and Markets expects the global AI server market to grow at a CAGR of 26.5% from 2024 to 2029.
From fiscal 2023 to fiscal 2026, analysts expect Supermicro's revenue and EPS to increase at CAGRs of 58% and 52%, respectively. Those are impressive growth rates for a stock that trades at just 27 times next year's earnings.
The bull case vs. the bear case
The bulls believe Supermicro will maintain its early-mover advantage in the AI server market, continue to grow its market share, and expand beyond Nvidia-powered AI servers through new deals with AMD and Intel .
In Loop Capital's latest investor note in April, it said Supermicro's business "remains healthy" and will profit from the expansion of the AI market. Loop Capital also co-managed a $1.7 billion senior unsecured convertible notes offering for Supermicro this February, so it might have a deeper insight into its core business than other Wall Street firms.
Assuming Supermicro meets Wall Street's expectations and still trades at 27 times forward earnings, its stock price could nearly hit $1,100 by the beginning of fiscal 2026. To hit $1,500 by then, it would need to be trading at about 37 times forward earnings. That's not terribly expensive for a high-growth AI stock, but it's a bit pricey compared to traditional server makers like Dell and HPE, which trade at 24 and 13 times forward earnings, respectively. If Supermicro's growth unexpectedly cools off and it's revalued as a legacy server maker again, its stock could plummet.
The bears believe that could happen for two simple reasons. First, competition from Dell and HPE -- which are both expanding their AI server businesses -- could curb Supermicro's growth and crush its margins. Supermicro's partnership with Nvidia also isn't exclusive, and its top competitors are buying up a lot of those data center GPUs. Second, the broader AI market could gradually cool off, and that slowdown might be exacerbated by tighter regulations, geopolitical tensions, and export curbs.
Does Loop Capital's price target seem reasonable?
I'm optimistic about Supermicro's future , but I don't think it will hit $1,500 in three years. I believe its strengths outweigh its weaknesses, but the average price target of just over $1,000 seems more reasonable in this choppy market. Over the long term, Supermicro could soar past $1,500 if it maintains its lead in liquid-cooled high-end servers and expands its slice of the AI server market. That said, investors should buckle up and brace for a lot of volatility before it reaches that target.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy .
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