Shares of Super Micro Computer (NASDAQ: SMCI) were red-hot on the market over the past year, delivering eye-popping gains of 630% as of this writing. It’s all thanks to the terrific growth that the company delivered because of the booming demand for its artificial intelligence (AI)-focused server solutions. Even better, the stock should continue to climb higher following the company’s release of its latest earnings report.
Super Micro stock shot up another 12% after the release of its fiscal 2024 second-quarter results (for the three months ended Dec. 31, 2023) on Jan. 29. Let’s see why that was the case before checking if Super Micro remains worth buying after the tremendous gains it has clocked in the past year.
Super Micro’s outstanding results and guidance point toward better times
Super Micro’s fiscal Q2 revenue more than doubled year over year to $3.66 billion, compared to $1.80 billion in the prior-year quarter. The company also reported non-GAAP net income of $5.59 per share, a jump of 71% from the year-ago period. Wall Street was expecting $5.05 per share in earnings on $2.8 billion in revenue.
It is worth noting that these numbers were higher than the company’s updated guidance. On Jan. 18, Super Micro announced that it expected fiscal Q2 revenue to land between $3.6 and $3.65 billion, along with earnings of $5.40 to $5.55 per share. That was a big upgrade over its prior guidance range of $2.8 billion in revenue and $4.44 per share in adjusted earnings.
Super Micro raised its full-year guidance in light of the surprisingly positive performance. It now expects fiscal 2024 revenue of $14.5 billion at the midpoint of its guidance range, which is a substantial increase over the prior expectation of $10.5 billion. The new revenue guidance means Super Micro is forecasting its full-year top line to more than double from fiscal 2023’s reading of $7.1 billion.
Super Micro credits its robust growth to the solid demand for its AI server solutions. In the words of CFO David Weigand:
Our growth was driven by demand from new and existing customers for our leading AI and rack-scale Total IT solutions and an improving supply chain. Next-generation AI and CPU platforms continue to drive strong levels of design wins, orders and backlog from top-tier data centers, emerging cloud service providers (CSPs), enterprise/channel, and edge/IoT/telco customers.
More specifically, Super Micro management says that its AI-focused server rack solutions, which are used for mounting graphics processing units (GPUs) from the likes of Nvidia, Intel, and Advanced Micro Devices, accounted for more than half of its total revenue. That’s not surprising, as the demand for AI servers has been growing rapidly to support the training of AI models. Market research firm Gartner estimates that shipments of AI servers could increase at an annual rate of 30% through 2027, generating annual revenue of $81 billion.
The firm adds that companies will likely continue to favor spending on large AI-specific server systems. Super Micro has set itself up to make the most of this opportunity, pointing out on the latest earnings conference call that it is about “to more than double the size of our current AI portfolio with the coming soon NVIDIA CG1, CG2 Grace Hopper(TM) Superchip, H200 and B100 GPUs, L40S Inferencing-optimized GPUs, AMD MI300X/MI300A, and Intel’s Gaudi 2/3. All these new platforms will be ready for high volume production in the coming month and quarters.”
Super Micro also says that the utilization rate of its existing production facilities in the U.S., Taiwan, and the Netherlands currently stands at 65%, and it is expected to improve further thanks to the robust end-market demand. What’s more, the company is going to add two new production facilities in the U.S. in the next few months and points out that its new facility in Malaysia should allow it to increase volume production and lower costs simultaneously.
In all, Super Micro management believes that the company’s new sites will raise its annual revenue capacity above $25 billion. That’s significantly higher than the revenue it is on track to generate this year.
Should investors still buy the stock?
Though Super Micro’s stock price has skyrocketed over the past year, it still trades at an attractive 3 times sales. That’s not very expensive considering the company’s exceptional growth and the fact that the S&P 500 has an average price-to-sales ratio of 2.7.
We have already seen that Super Micro is boosting its production capacity so that it can generate $25 billion in annual revenue. Assuming a conservative annual revenue growth rate of 20%, compared to the roaring growth that Super Micro is currently clocking, it will take three years to hit that mark based on its fiscal 2024 revenue estimate. If the company maintains its sales multiple of 3 at that time and generates $25 billion in revenue in fiscal 2026, its market cap could increase to $75 billion.
That points toward a 150% jump from current levels. So investors looking to add a top AI stock to their portfolios can still consider buying Super Micro Computer given its attractive valuation and the potential upside it could deliver.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Gartner, Intel, and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Super Micro Computer Stock? was originally published by The Motley Fool