Time to Buy the Dip in Super Micro Computer Stock?

Shares of this AI tech hardware leader could be ready to take off again.

Super microcomputer (SMCI -3.05%) has emerged as one of the big winners amid the artificial intelligence (AI) technology boom.

The company responds to the strong demand for specialized computer systems as a plug-and-play data center service. On the other hand, the stock has cooled after a spectacular rally at the start of the year. Shares are up 170% in 2024, but are also down 37% from a 52-week high reached in early March.

With the tailwind of operational and financial momentum expected to continue, could Super Micro Computer be ready to restart? I believe so, and here’s why.

A crucial player in the AI ​​ecosystem

Featuring the latest GPU-based AI chips from Nvidia or Advanced micro devices high-performance computing requires an extensive hardware infrastructure.

Meet Super Micro Computer, whose rack-scale systems integrate all the necessary power, storage, cooling and software components that make it all work.

This measure allows the company to benefit from the explosive growth of complex data processing needs. Supermicro is recognized as building Nvidia-certified GPU server systems, including systems containing the latest Blackwell superchips and the B200 Tensor Core GPUs.

Revenue for the last reported fiscal third quarter was $3.9 billion, up 200% year-over-year. Earnings per share (EPS) of $6.65 grew even faster, rising 308% from $1.63 in the prior year quarter.

All indications are that there is more potential for growth as customers invest heavily in accelerated computing applications, including AI and machine learning. Management expects fourth-quarter revenue to be between $5.1 billion and $5.5 billion, representing an average increase of 143% year over year.

A person who analyzes information from a computer.

Image source: Getty Images.

The bullish case for investing in Supermicro

Supermicro is moving forward with expanding manufacturing capabilities around the world, including its San Jose, California factory, along with operations in Taiwan and Malaysia. The metric that stands out is the planned capacity to produce 5,000 racks per month this year, which represents a big increase from 4,000 at the end of last year, or 3,000 in 2022.

The company sees room to reach $25 billion in annual revenue in the coming years, compared to 2024 expectations of between $14.7 billion and $15.1 billion.

The driver here is not only a shift to higher value opportunities, including AI-focused data center products, but also leveraging the installed base of hardware in the ‘5S strategy’ that combines software, services, switches, storage and security as a total IT system includes. provider.

One area of ​​optimism is the ability to integrate liquid cooling across the product portfolio, allowing energy-intensive computer systems to run more efficiently.

For the next generation of AI chips and applications, direct liquid cooling (DLC) is seen as a requirement that will allow Supermicro to stand out as a differentiated supplier compared to the traditional general purpose computer server manufacturing market.

That effort could be positive for margins and profits, as current Wall Street analyst estimates indicate. Consensus EPS for the remainder of fiscal 2024 and the next two years has been trending upward in recent months, indicating confidence in Supermicro’s prospects. The market expects earnings per share of $23.78 this year, up 42% in fiscal 2025 to $33.73, and up 24% again for fiscal 2026 to $41.92.

In my view, Supermicro shares trading at 23 times next year’s consensus earnings offer good value within the technology arena given its growth and earnings momentum.

SMCI EPS estimates for the current fiscal year

SMCI EPS estimates for current fiscal year data according to YCharts

Final thoughts

Despite the weakness in Supermicro’s share prices in recent months, it’s fair to say its prospects are as strong as ever. The company’s solid fundamentals and ability to consolidate its leadership in increasingly sophisticated data center infrastructure contribute to the stock’s appeal as an attractive investment. It probably won’t be a straight line higher, but I see more upside potential for the stock going forward.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.