Looking back on Super Micro Computer (NASDAQ: SMCI) five years ago, few likely envisioned it would reach the heights it has today. It has existed since 1993 and has traded as a stock since 2007. Despite building a large, successful business, the company was largely unknown outside its industry and drew little interest from stock investors.
Supermicro's fortunes changed dramatically when its partnership with Nvidia brought about exponentially higher sales of AI-capable servers. This helped lead to the AI stock rising by over 3,500% over the last five years. Admittedly, another 3,500% increase in the next five years is unlikely, but the stock can probably generate market-beating returns during that time. Here's why.
The state of Supermicro
The most surprising things about Supermicro are its longtime obscurity and meteoric rise to prominence. The company describes itself as a "rack-scale total IT solutions provider" that creates environmentally friendly and energy-saving machinery.
It produces first-to-market hardware for the edge, 5G, data centers, the cloud, and AI in approximately 6 million square feet of manufacturing space. Moreover, it operates in more than 100 countries, meaning it built an extensive footprint despite receiving little attention from investors until recently.
The company's growth has now become too significant for investors to ignore. In the first nine months of fiscal 2024 (ended March 31), it reported $9.6 billion in revenue, a 95% yearly increase. With that, net income surged to $855 million compared with $446 million in the same year-ago period.
Where Supermicro is going
Additionally, its rapid growth is on track to continue. Markets.us estimates the compound annual growth rate (CAGR) for the AI server industry will exceed 30% through 2033.
Fortunately for Supermicro's shareholders, company estimates far exceed that rapidly growing industry CAGR. In the most recent earnings report, the company raised its fiscal 2024 revenue guidance to $14.7 billion, which would mean a 107% growth rate if revenue levels match the company estimate.
As for the stock, it has risen by almost 130% over the last year. Still, nearly all of that growth occurred in the first three months of the calendar year, and the stock has pulled back by more than 40% since peaking in March.
However, that price correction could dramatically increase Supermicro's odds of outperforming the indexes. Its P/E ratio had reached 90 as its stock peaked. Now, with rising profits and falling stock prices, the earnings multiple has dropped to 39. Its PEG ratio of just 0.6 confirms that its P/E ratio is at a very low level, considering the rapid growth of its profits.
Furthermore, analysts forecast that Supermicro's net income will grow by an average of 62% per year for the next five years. Admittedly, this is a "way too early" estimate and will likely change significantly as more information becomes known. Still, if profits grow at an average close to this estimate, it is likely the rapid growth of Supermicro stock will continue.
Supermicro in five years
Although a lot can happen in five years, Supermicro stands a high likelihood of beating the market over that time. As stated before, investors should not expect another 3,500% gain over five years, nor should they expect the company to maintain revenue growth near the triple-digits over the long run.
Nonetheless, the AI servers produced by Supermicro are experiencing unprecedented demand, leading to massive gains in the stock price. Moreover, even if estimates for the future change significantly, both Supermicro and its industry should experience rapid growth rates for years to come.
Additionally, considering the growth rates of the recent past, the 39 P/E ratio and the PEG ratio under 1 arguably make Supermicro a bargain stock. Given its recent pullback, now might be a good time to add shares.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0