Super Micro Computer's (NASDAQ: SMCI) incredible year just got even better. Last Friday, after the markets closed, S&P Global announced that the maker of servers and storage equipment often used for AI applications will join the benchmark S&P 500, along with several other stocks.
Shares of Supermicro (as it's commonly known) have jumped over 25% since the news broke and a whopping 297% year to date, fueled by a December quarter earnings report that was much better than its guidance -- and by the same tailwinds that have fueled other AI stocks as the enormity of demand for these companies' products becomes clearer.
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What the S&P 500 means for Supermicro
Admission to the S&P 500 also marks a significant milestone for Supermicro. Just a couple of months ago, entering the closely watched benchmark index would have been a fantasy, but the stock's monster gains this year and massive revenue growth, at 103% in its most recent update, seem to have persuaded the S&P 500's gatekeepers to make it a member.
There is no strict formula for companies to be added to the S&P 500, but they must be based in the U.S. and have a profit based on generally accepted accounting principles (GAAP) over the past four quarters. From there, it's mostly a question of market capitalization and diversification, and Supermicro closed the regular Friday session with a market value of $50.6 billion, well ahead of the other three latest entrants into the S&P 500: Whirlpool at $5.8 billion, Zions Bancorporation at $5.7 billion, and Deckers Outsdoor at $23.1 billion.
Selection for the S&P 500 acts as an important stamp of approval for Supermicro as it shows that S&P Global believes its recent gains won't be easily undone even though some analysts have talked of an AI bubble. The news also gave the stock a double-digit boost because ETFs that track the S&P 500 will now have to buy shares of Supermicro to stay current with the updated index, increasing demand for the stock and restricting supply.
Super Micro Computer will join the S&P 500 on March 18, which is when the ETFs will add the stock, leading to a spike in volume.
Is Super Micro Computer stock a buy?
Since the start of 2023, when the AI boom began to build momentum following the launch of ChatGPT, Supermicro's stock has gained a whopping 1,000%, easily beating even Nvidia during that period.
Unlike some so-called AI stocks, Supermicro's gains have been earned rather than just levitating on hype. The business is delivering phenomenal growth at the moment as its high-density servers excel at running intense AI applications and its products are in high demand. As noted, revenue doubled in its most recent quarter to $3.66 billion, and GAAP net income jumped 68% to $296 million.
Supermicro, which works closely with Nvidia, said that demand for its products is still outstripping supply, a sign that its growth still has room to accelerate. CEO Charles Liang also expressed optimism on the earnings call that the AI boom was here to stay:
Overall, I feel very confident that this AI boom will continue for another many quarters if not many years. And together with the related inferencing and other computing system requirements, demand can last for even many decades to come. We may call this an AI revolution.
Since Supermicro's report, more evidence has made it clear that AI demand is even stronger than believed. Arm shares skyrocketed on its earnings report as it felt the effects of the AI boom, and then Nvidia beat expectations as well. On Friday, Dell Technologies, which also makes AI servers, jumped more than 30% on its earnings report, as it said demand was outpacing supply for those servers. The broader AI sector rose on the news as well.
Supermicro shares also look reasonably priced for a company with its growth, as the stock is trading at a trailing price-to-earnings ratio of 70, but that valuation shrinks to just over 30 based on estimates for fiscal 2025, which ends next June.
With admission to the S&P 500 soon to come, a large backlog of orders, and more signs that the AI boom is still in its early stages, Super Micro Computer stock looks like an excellent buy even after skyrocketing this year.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and S&P Global. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
