Super Micro Computer (NASDAQ:SMCI), a high-performance server and storage solutions manufacturer based in the U.S., has seen its stock surge by 250% this year. Even on the back of these gains, Super Micro Computer is attracting Wall Street bulls. On March 25, JPMorgan (NYSE:JPM) initiated coverage of the company and assigned a price target of $1,150, which implies upside potential of 13%. Despite promising prospects, though, I’m neutral on SMCI stock, as I believe the current valuation leaves no margin of safety.
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Super Micro Computer Is an AI Winner
Super Micro is known for designing high-performance servers ranging from rackmount servers, blade servers, and GPU servers. In addition, the company offers storage and networking solutions as well. Today, the company is targeting several end markets, such as data centers, AI, 5G, and cloud computing.
Leveraging its expertise in designing advanced rack-scale solutions, Super Micro has been quick to focus on AI rack-scale solutions in the last few years. On the back of lucrative partnerships with leading chipmakers, including Nvidia Corporation (NASDAQ:NVDA), Super Micro has emerged as the leading infrastructure partner in the AI computing space.
The demand for AI servers is expected to grow exponentially in the next five years, with almost every business sector embracing AI to drive efficiency gains while transforming the consumer experience. According to Research and Markets, the global AI server market will grow at a CAGR of 27% through 2029. Super Micro, as the leading player in this space, is well-positioned to benefit from this growth.
One of Super Micro’s strengths is its industry-leading time to market, which became evident recently when Nvidia launched its all-new Blackwell GPU platform. In less than a few hours following Nvidia’s announcement of the Blackwell platform, Super Micro announced that the company is launching new rack architectures featuring Blackwell. This was possible because Super Micro already owns matching server products that are ready to be deployed immediately.
According to Barclays (NYSE:BCS) analysts George Wang and Tim Long, Super Micro’s time to market may be its biggest competitive strength, given that most of its rivals have a much longer product development cycle.
Investments in Innovation Will Drive Growth
Amid the surging demand for AI infrastructure solutions, Super Micro is aggressively investing to expand its production capacity and retain its market leadership through innovation.
Super Micro recently raised $600 million in working capital to aggressively pursue growth opportunities in this space. In addition, on March 19, the company announced a new equity offering to raise $1.75 billion to fund working capital needs, manufacturing capacity expansions, and other R&D needs.
Although shareholders generally are spooked by dilution, the company’s investments are likely to yield lucrative returns both in the short and long run amid the exponentially growing demand for AI infrastructure.
According to company filings, Super Micro’s production utilization rate is currently at around 65% across its global manufacturing plant network, including the U.S., Netherlands, and Taiwan. With the growing demand for AI infrastructure solutions, the company expects these plants to be operating at full capacity in the next few months.
To bridge the gap between demand and supply, Super Micro is planning to open two new production facilities in the U.S. in a few months. In addition, the company is building a new plant in Malaysia. According to CEO Charles Liang, these manufacturing capacity expansions will boost the revenue potential of Super Micro to over $25 billion from around $9 billion today.
One key business area in which Super Micro is gaining traction is the data center liquid cooling market. Helped by recent investments, the company is planning to produce 1,500 liquid cooling racks per month by June. In the data center space, liquid cooling racks are gaining popularity as companies are replacing air cooling technology to support high-performance AI capabilities. According to Mordor Intelligence, the data center liquid cooling market will grow at a CAGR of 25.44% through 2029 to $14.8 billion.
Super Micro’s strategic investments in this space will help the company benefit from these stellar growth expectations in the next five years.
SMCI’s High Valuation Gives No Margin of Safety
On the back of a stellar market performance this year, Super Micro Computer looks richly valued at a forward P/E ratio of 47. The AI chip leader, Nvidia, which has reported faster revenue growth and better profit margins compared to Super Micro, is currently valued at a forward P/E of 37. Although these two businesses have distinct characteristics, it does not seem rational for Super Micro to trade at a premium to Nvidia, given that Nvidia is leading the global AI revolution.
Is Super Micro Computer a Buy, According to Analysts?
JPMorgan analyst Samik Chatterjee believes Super Micro’s market leadership in the AI computing space will not be threatened in the foreseeable future. The analyst also expects the company’s market share to grow in the AI server market. The growing size of the AI server market has a lot to do with JPMorgan’s bullish stance on Super Micro.
Last January, after Super Micro reported quarterly earnings, many Wall Street analysts issued positive remarks. Susquehanna analyst Mehdi Hosseini believes the AI computing market is still in the early stages of growth, which leaves ample room for Super Micro to grow in the coming years. Wedbush Securities analyst Matt Bryson believes the company’s strong pipeline of products will enable it to grow exponentially in the coming years.
Overall, in the last three months, Wall Street analysts have positively revised their earnings per share estimates for Fiscal 2024 ending in June in 10 instances, which highlights the strong earnings momentum behind the company. Based on the ratings of nine Wall Street analysts, SMCI stock has a Moderate Buy consensus rating. Nonetheless, the average SMCI stock price target is $965.64, which implies downside risk of 3.1%.
The Takeaway: Super Micro’s Expected Growth is Priced In
Super Micro, aided by strategic investments in innovation and manufacturing capacity expansions, is well-positioned to grow. The company’s market leadership in the AI computing space suggests it is enjoying strong competitive advantages. However, although growth prospects look bright, Super Micro’s valuation leaves no margin of safety for investors today, which makes it risky to bet on the company’s growth at these prices.
