Super Micro Computer (NASDAQ: SMCI), more commonly known as Supermicro, posted its latest earnings report on Nov. 1. For the first quarter of fiscal 2024, which ended on September 30, the server maker's revenue rose 15% year over year to $2.12 billion and exceeded analysts' expectations by $60 million. Its adjusted net income grew 3% to $192 million, or $3.43 per share, and cleared the consensus forecast by $0.18.
Supermicro's headline numbers seemed stable, but does its stock still have room to run after rallying more than 200% over the past 12 months? Let's see where this high-flying stock might end up in a year.
Why did Supermicro's stock soar over the past year?
Supermicro sells high-end servers to more than 1,000 customers in over 100 countries. It currently controls nearly 5% of the global server market, according to History-Computer, which makes it the world's seventh-largest server company. Dell and Hewlett-Packard Enterprise, which control about 17% of the fragmented market, are its two largest competitors.
Supermicro didn't attract much attention when it went public in 2007, but its stock caught on fire over the past three years as investors recognized the growth potential of its dedicated artificial intelligence (AI) servers. The growth of that business was driven by a partnership with Nvidia, which provided the latest high-end GPUs for its prebuilt servers. That close relationship enabled Supermicro to carve out a high-growth niche in the AI server market and grow faster than Dell and HPE, which both generate a larger portion of their sales from legacy servers.
Supermicro's revenue only grew 7% in fiscal 2021 (which ended in June 2021) but surged 46% in fiscal 2022 and rose another 37% in fiscal 2023. Its adjusted net income slipped 9% in fiscal 2021 but soared 129% in fiscal 2022 and 116% in fiscal 2023.
Supermicro attributed that rapid growth to the secular expansion of the AI market, as well as its market share gains against legacy server makers like Dell and HPE. During its conference call for the fourth quarter of fiscal 2023, CEO Charles Liang said nearly half of its quarterly revenue was already coming from AI-related designs. Northland Capital Markets estimated that Supermicro had more than doubled its share of the AI server market sequentially from 7% in its fiscal third quarter to 17% in its fiscal fourth quarter at the expense of its larger competitors.
Can Supermicro maintain that momentum over the next 12 months?
Supermicro now expects its revenue to rise 40% to 54% in fiscal 2024, compared to its prior outlook for 33% to 47% growth. It raised that forecast even as it grappled with supply chain constraints in the GPU market.
There's a strong possibility that the recent export curbs against Nvidia's advanced AI chip sales to China, which left about $5 billion of its China-bound chips in limbo, will free up more GPUs for Supermicro's servers. During the call, Liang said it predicted its GPU supply from Nvidia would be "much better" in the second quarter of fiscal 2024.
Supermicro's own business in China, which is grouped with other countries in its Asia region that accounted for 15% of its sales in fiscal 2023, won't be heavily affected by those export curbs because it only sells its servers in China through a minority-owned joint venture with a private Chinese company. It also significantly reduced its exposure to China and excised Chinese manufacturers from its supply chain back in 2019 amid allegations that they were installing spy chips in its motherboards. That lighter exposure to China could make Supermicro a more appealing AI play than Nvidia, which directly generated 21% of its revenue from China in its latest fiscal year.
It's still an undervalued play on the AI market
Analysts expect Supermicro's revenue and adjusted EPS to grow 42% and 44%, respectively, in fiscal 2024. Those are impressive growth rates for a stock that trades at just 15 times forward earnings.
Dell and HPE might seem cheaper at 10 and 7 times forward earnings, but both companies are growing much slower than Supermicro. Dell and HPE also aren't "pure-play" server makers like Supermicro, and both of those larger companies generate a much lower percentage of their revenue from dedicated AI servers. Therefore, Supermicro likely deserves a much higher valuation than both of those tech giants. Instead, it deserves to be compared more closely to Nvidia, which trades at 25 times forward earnings.
Supermicro's growth could certainly cool off if the AI boom ends. However, I believe Supermicro's stock will likely head higher and outperform the market over the next 12 months as the expansion of the generative AI market compels more data centers to buy its AI servers.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.