Supermicro Computer Could Be A Boss-Level AI Play

Supermicro Computer Could Be A Boss-Level AI Play
Russell Burns

6 months ago4 mins

  • Supermicro supplies tech titans with the servers, storage, and networking equipment they need to run AI data centers.

  • With high-spec, energy-efficient, customizable options, Supermicro has a leading position in the market. So as AI ramps up, Supermicro’s sales will likely follow.

  • Supermicro’s share price has already tripled this year, but its valuation multiple is only marginally higher since its earnings estimates have also been pulled up.

Supermicro supplies tech titans with the servers, storage, and networking equipment they need to run AI data centers.

With high-spec, energy-efficient, customizable options, Supermicro has a leading position in the market. So as AI ramps up, Supermicro’s sales will likely follow.

Supermicro’s share price has already tripled this year, but its valuation multiple is only marginally higher since its earnings estimates have also been pulled up.

Mentioned in story

Nvidia's undoubtedly the AI market leader, but be wary: tunnel vision could mean you miss out on other companies with unprecedented potential. One has already tripled its share price this year, yet it’s still trading at a decent valuation. Introducing: Supermicro Computer.

Supermicro Computer Stock Info

What is Supermicro Computer?

We’ll dive into the details in a minute, but here are three key points you should know.

Supermicro is a market leader in the world of high-performance servers, cloud tech, and networking equipment.

With a line of customized, energy-efficient, and high-spec solutions, the firm has AI data centers lining up around the block and counts tech titans like Amazon, Intel, and Meta among its customers.

Demand for AI and machine learning is only projected to move in one direction, and the firm’s expected to double both sales and profit over the next two years.

What is Supermicro’s role in the AI revolution?

Supermicro was well set up to become a frontrunner in the AI race. Founded in California back in 1993, the engineering-led company’s spent decades developing industry-leading expertise and established itself as a strategic partner to leading mega-firms. And because Supermicro specializes in highly customized products, it can win more contracts, set prices higher, and maintain beefier margins.

As for AI, those smarts come at a cost. Just take investor darling Nvidia: its high-performance chips are powering much of the tech revolution, but they’re not much use without custom, cutting-edge data centers to put them to work. It’s Supermicro that supplies the ridiculously complicated tech behind these centers: servers, network, and cloud storage solutions. Check out some of its key products:

Supermicro products. Source: Supermicro.
Supermicro products. Source: Supermicro.

These data centers are huge, each full of thousands of servers. Here’s a visual example: Intel built a data center in Silicon Valley using over 300,000 Supermicro servers.

Intel Supemicro case study. Source: Supermicro.

Supermicro’s tech isn’t just powerful, it’s efficient. The firm’s ahead of the game when it comes to cooling systems for data centers, which save on resources by reducing emissions and operating costs. That’s pretty much essential in data centers: they devour energy at lightning speed, and any risk of overheating computer equipment threatens to slow down operations

Today, Supermicro makes around 90% of its sales from server and storage system products. Most of those sales, 76%, come from the US, while 10% are from Europe and 11% from Asia. The company’s fairly sheltered from geopolitical risk: it operates in the US, Taiwan, and Malaysia, and no longer holds operations in China. (We’ll touch on that later.)

What’s the outlook for Supermicro?

Supermicro’s share price (left-side axis) and earnings per share (right-side axis) estimates. Source: Bloomberg.

Supermicro’s share price has rallied (white line) so far this year, with investors sparked up by increasing earnings per share estimates (red line) – a result of mounting AI-related orders. Servers and storage systems accounted for 93% of Supermicro’s total revenue in the quarter ending June 2023 – up 70% from the quarter before and 34% from the same time the year before. But even though sales and profit both came in ahead of expectations that quarter, investors were spooked by the firm’s admittance of supply bottlenecks. They sent its share price down after the results announcement in early August.

The future looks heady, though. Supermicro is expected to keep its sales and profit moving upward by supplying to all types of industry-shaping tech firms. Thanks to its scale and heft, the firm can ship out thousands of products – and fast. They’ll cost a pretty penny, too: one of Supermicro’s high-end servers, using advanced Nvidia chips, costs around $150,000.

How pricey is Supermicro’s valuation?

Considering Supermicro’s projected profit, its valuation isn’t bad. The table below shows that both its operating profit and earnings per share are expected to nearly double over the next two years. Still, with a price-to-earnings ratio of 11.5x (based on projected earnings for the year ending June 2025), it’s hardly unreasonable for a firm with both feet in the door of the AI revolution.

Consensus earnings estimates and valuations. Source: Bloomberg.

Now, it’s true that immediate server peers like Dell Computer and Hewlett Packard also trade around a 10x price-to-earnings ratio. But bear in mind, their business – and profit – isn’t predicted to transform as much at the hands of AI.

What’s more, Supermicro makes up 0.5% of the Russell 2000, claiming the accolade of the heaviest weighting in the index. The Russell 2000’s earnings per share are predicted to grow 14% annually, and it’s trading at a forward price-earnings ratio of 18x. Compare that to Supermicro itself, and the company’s trading at a significant discount.

What are the risks?

Growth stocks give investors a lot to be excited about, but their risks can pack a punch. In Supermicro’s case, any more supply chain bottlenecks could hold the firm back from keeping up with demand – and there’s always the chance that a competitor comes along to steal market share.

There’s also a scandal in the mix. Back in 2018, Bloomberg alleged that China had placed modified hardware or malicious chips within Supermicro’s motherboards, a component of servers. Apple and Amazon were also pulled into the drama, both unequivocally denying that any of their products or security had been compromised. These claims were never proven to be true, and Supermicro has since moved production out of China to reduce any potential concerns from customers. Still, any allegations of this nature in the future could impact its share price.

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