Why Super Micro Computer (SMCI) Could Be a Hidden Gem for Growth Investors

In March 2024, Super Micro Computer, Inc. (SMCI) became the latest artificial intelligence (AI) company to join the S&P 500 index, just a little more than a year after joining the S&P MidCap 400 in December 2022. Shares of SMCI jumped by more than 2,000% in the past two years, driven by robust demand for its AI computing products, which led to rapid sales growth.

Moreover, SMCI’s stock has surged nearly 205% over the past six months and more than 520% over the past year. A historic rally in the stock has pushed the company’s market cap past $48 billion.

SMCI is a leading manufacturer of IT solutions and computing products, including storage and servers tailored for enterprise and cloud data centers, purpose-built for use cases such as AI, cloud computing, big data, and 5G applications. The company has significantly benefited from the ongoing AI boom in the technology sector.

According to ResearchAndMarkets.com’s report, the global AI server market is expected to reach $50.65 billion by 2029, growing at a CAGR of 26.5% during the forecast period (2024-2029).

Specializing in servers and computer infrastructure, SMCI maintains long-term alliances with major tech companies, including Nvidia Corporation (NVDA), Intel Corporation (INTC), and Advanced Micro Devices, Inc. (AMD), which have fueled the company’s profitability and growth.

Let’s discuss Super Micro Computer’s fundamentals and growth prospects in detail:

Recent Strategic Developments

On April 9, SMCI announced its X14 server portfolio with future support for the Intel® Xeon® 6 processor with early access programs. Supermicro’s Building Block Architecture, rack plug-and-play, and liquid cooling solutions, along with the breadth of the new Intel Xeon 6 processor family, enables the delivery of optimized solutions for any workload and at any scale, offering superior performance and efficiency.

The upcoming processor family will be available with Efficient-core (E-core) SKUs rising performance-per-watt for cloud, networking, analytics, and scale-out workloads, and Performance-core (P-core) SKUs increasing performance-per-core for AI, HPC, Storage and Edge workloads. 

Also, the upcoming processor portfolio will feature built-in Intel Accelerator Engines with new support for FP16 on Intel Advanced Matrix Extensions.

In the same month, SMCI expanded its edge compute portfolio to accelerate IoT and edge AI workloads with a new generation of embedded solutions.

“We continue to expand our system product line, which now includes servers that are optimized for the edge and can handle the demanding workloads where massive amounts of data are generated,” said Charles Liang, president and CEO of SMCI.

“Our building block architecture allows us to design and deliver a wide range of AI servers that give enterprises the solutions they need, from the edge to the cloud. Our new Intel Atom-based edge systems contain up to 16GB of memory, dual 2.5 GbE LAN ports, and a NANO SIM card slot, which enables AI inferencing at the edge where most of the world's data is generated,” Liang added.

Also, on March 19, Supermicro unveiled its newest lineup aimed at accelerating the deployment of generative AI. The Supermicro SuperCluster solutions offer foundational building blocks for the present and the future large language model (LLM) infrastructure.

The full-stack SuperClusters include air- and liquid-cooled training and cloud-scale inference rack configurations with the latest NVIDIA Tensor Core GPUs, Networking, and NVIDIA AI Enterprise software.

Further, SMCI announced new AI systems for large-scale generative AI featuring NVIDIA's next-generation of data center products, such as the latest NVIDIA GB200 Grace™ Blackwell Superchip, the NVIDIA B200 Tensor Core, and B100 Tensor Core GPUs.

Supermicro is upgrading its existing NVIDIA HGX™ H100/H200 8-GPU systems for seamless integration with the NVIDIA HGX™ B100 8-GPU, thus reducing time to delivery. Also, the company strengthens its broad NVIDIA MGX™ systems range with new offerings featuring the NVIDIA GB200, including the NVIDIA GB200 NVL72, a comprehensive rack-level solution equipped with 72 NVIDIA Blackwell GPUs.

Additionally, Supermicro is introducing new systems to its portfolio, including the 4U NVIDIA HGX B200 8-GPU liquid-cooled system.

Solid Third-Quarter 2024 Results

For the third quarter that ended March 31, 2024, SMCI’s revenue increased 200.8% year-over-year to $3.85 billion. Its non-GAAP gross profit grew 163.9% from the year-ago value to $600.59 million. Its non-GAAP income from operations was $434.42 million, up 290.7% year-over-year.

The server assembler’s non-GAAP net income rose 340% from the prior year’s quarter to $411.54 million. Its non-GAAP net income per common share came in at $6.65, an increase of 308% year-over-year.

As of March 31, 2024, Super Micro Computer’s cash and cash equivalents stood at $2.12 billion, compared to $440.46 million as of June 30, 2023. The company’s total current assets were $8.06 billion versus $3.18 billion as of June 30, 2023.

Charles Liang, President and CEO of Supermicro, said, “Strong demand for AI rack scale PnP solutions, along with our team’s ability to develop innovative DLC designs, enabled us to expand our market leadership in AI infrastructure. As new solutions ramp, including fully production ready DLC, we expect to continue gaining market share.”

Raised Full-Year Revenue Outlook

SMCI expects net sales of $5.10 billion to $5.50 billion for the fourth quarter of fiscal year 2024 ending June 30, 2024. The company’s non-GAAP net income per share is anticipated to be between $7.62 and $8.42.

For the fiscal year 2024, Supermicro raised its guidance for revenues from a range of $14.30 billion to $14.70 billion to a range of $14.70 billion to $15.10 billion. Its non-GAAP net income per share is expected to be from $23.29 to $24.09.

CEO Charles Liang said he expects AI growth to remain solid for several quarters, if not years, to come. To support this rapid growth, the company had to raise capital through a secondary offering this year, Liang added.

Meanwhile, finance chief David Weigand said that the company’s supply chain continues to improve.

Bottom Line

SMCI’s fiscal 2024 third-quarter results were exceptional, with a record revenue of $3.85 billion and a non-GAAP EPS of $6.65. This year-over-year revenue growth of 200% and year-over-year non-GAAP EPS growth of 308% significantly outpaced its industry peers.

After reporting outstanding financial performance, the company raised its full-year revenue forecast as it points to solid AI demand.

Super Micro Computer, which joined the S&P 500 in March, has a unique edge among server manufacturers aiming to capitalize on the generative AI boom. Notably, the server maker’s close ties with Nvidia allow it to launch products superior to competitors, including Dell Technologies Inc. (DELL) and Hewlett Packard Enterprise Company (HPE).

The company has a history of being among the first to receive AI chips from NVDA and AMD as it assists them in checking server prototypes, giving it a head start over rivals. This has positioned SMCI as a key supplier of servers crucial for generative AI applications, leading to a remarkable 192% surge in shares so far this year.

According to an analyst at Rosenblatt Securities, Hans Mosesmann, “Super Micro has developed a model that is very, very quick to market. They usually have the widest portfolio of products when a new product comes out from Nvidia or AMD or Intel.”

Moreover, analysts at Bank of America project that SMCI’s share of the AI server market will expand to around 17% in 2026 from 10% in 2023. Argus analyst Jim Kelleher also seems bullish about SMCI. Kelleher maintained a Buy rating on SMCI’s stock.

According to the analyst, Super Micro Computer is a leading server provider for the era of generative AI. Alongside a comprehensive range of rack and blade servers for cloud, enterprise, data center, and other applications, SMCI offers GPU-based systems for deep learning, high-performance computing, and various other applications.

Given solid financials, accelerating profitability, and robust near-term growth outlook, investors could consider buying this stock for substantial gains.

Top AI Stocks to Buy Amidst Nvidia's Plunge

AI stocks have surged considerably this year, fueled by remarkable growth and enthusiasm for this breakthrough technology, with NVIDIA Corporation (NVDA) reigning as the dominant force. Its stock soared over 50% year-to-date, propelled by robust earnings. However, recent sell-offs hint that gains were primarily sentiment-driven and vulnerable to market dynamics.

NVDA’s shares nosedived by more than 14% over the last five days, surpassing the NASDAQ Composite Index's nearly 5% drop and the Dow Jones Industrial Average Index's minor decline in the same period.

When stocks like NVDA and Super Micro Computer, Inc. (SMCI) experience monumental growth, even minor setbacks trigger profit-taking, leading to cascading sell-offs. A single adverse event can snowball into significant losses as investors rush to secure profits amid fears of a bubble burst, highlighting the fragility of market sentiment.

Investor concerns have mounted as SMCI plunged by up to 21% in the last five days, reflecting apprehension about its upcoming earnings report. Although the company scheduled the release for April 30, it refrained from preannouncing earnings, unlike in January for its second-quarter results.

Typically, companies preannounce earnings when results exceed Wall Street consensus estimates. The absence of such a preannouncement from SMCI has stirred concerns on Wall Street. Analysts fear the upcoming earnings report may not match the previous quarter's robustness and could fall short of expectations.

NVDA isn’t immune to broader market sentiment despite its size and buffering impact. NVIDIA's chips are integral to SMCI's server solutions, leading investors to correlate potential weaknesses in SMCI's earnings with NVDA. 

Additionally, NVIDIA’s elevated valuation exacerbates market sensitivity. In terms of forward non-GAAP P/E, the stock trades at 30.58x, 34.1% above the industry average of 22.80x. Furthermore, its forward EV/Sales of 16.68x is 520% higher than the industry average of 2.69x, and its forward Price/Sales of 16.81x compares to the industry average of 2.69x.

Considering these factors, investors might explore alternative AI stocks poised to outperform NVDA in the near future. Amid NVDA's decline, these stocks offer diversified opportunities to capitalize on the burgeoning AI industry's growth potential.

Microsoft Corporation (MSFT)

Microsoft Corporation (MSFT), a leading tech company, posted stellar results surpassing analysts’ expectations, marking another quarter of double-digit growth in top and bottom lines. For the fiscal 2024 second quarter that ended December 31, 2023, the company’s total revenue surged 17.6% year-over-year to $62.02 billion and surpassed the consensus estimate of $61.13 billion. It reported a 32.5% increase in operating income to $27.03 billion.

Further, MSFT’s EPS increased 33.2% year-over-year to $21.87 billion and $2.93. That compared to analysts’ estimate of $2.77. The solid financial performance underscores the effective execution by MSFT's sales teams and partners, driving significant market share gains.

In addition to financial success, MSFT expanded its technological capabilities during the quarter. It integrated support for OpenAI's latest models, including GPT-4 Turbo, GPT-4 with Vision, and Dall-E 3, demonstrating its commitment to innovation and staying at the forefront of AI technology.

Furthermore, MSFT secured strategic partnerships and investments, enhancing its position in key markets. The company announced a $1.5 billion investment in G42, a leading UAE-based AI technology holding company, strengthening collaboration on AI initiatives and skilling programs globally.

Moreover, MSFT deepened its collaboration with Cloud Software Group Inc. through an eight-year strategic partnership agreement. This collaboration will drive cloud and AI solutions innovation, leveraging Microsoft Azure as the preferred cloud platform.

Looking ahead, analysts expect MSFT’s revenue to increase 15.3% year-over-year to $244.34 billion for the fiscal year ending June 2024. Its EPS for the current year is expected to grow 19.3% from the previous year to $11.70. For the fiscal year 2025, the consensus revenue and EPS estimates of $279.25 billion and $13.33 indicate increases of 14.3% and 13.9%, respectively.

Advanced Micro Devices, Inc. (AMD)

Advanced Micro Devices, Inc. (AMD) has spearheaded innovation in high-performance computing, graphics, and visualization technologies for over half a century. The company's recent enthusiasm revolves around the general availability of AMD Instinct MI300X accelerators, boasting industry-leading memory bandwidth performance for generative AI.

AMD has made significant strides in expanding its AI software ecosystem as well. The company has unveiled the latest version of its open-source ROCm™ 6 software stack optimized for generative AI. AI ecosystem leaders such as Databricks, Essential AI, Lamini, and OpenAI leverage AMD Instinct accelerators to provide differentiated AI solutions.

The company has also announced the AMD Ryzen 8040 Series mobile processors, featuring an integrated neural processing unit (NPU) on select models for AI. In 2022, AMD pioneered the introduction of an x86 processor with an on-chip NPU with the AMD Ryzen 7040 series mobile processors.

Furthermore, the company unveiled the AMD Ryzen 8000G Series desktop processors at CES 2024, the industry's first desktop PC processors with a dedicated AI NPU. At Microsoft Ignite, AMD and MSFT showcased how AMD Instinct MI300X accelerators, AMD EPYC CPUs, and AMD Ryzen CPUs with AI engines enable new services and compute capabilities across various domains.

Such innovative product launches have propelled AMD's financial performance. In the fourth quarter of fiscal 2023, AMD's non-GAAP revenue increased 10.2% year-over-year to $6.17 billion. Its non-GAAP gross profit grew 9.6% from the year-ago value to $3.14 billion. Also, the company's non-GAAP net income and EPS rose 12.2% and 11.6% from the prior year's period to $1.25 billion and $0.77, respectively.

Looking ahead, for the fiscal year ending December 2024, Street anticipates AMD’s revenue to increase 13.4% year-over-year to $25.72 billion, with its EPS expected to reach $3.60, marking a 35.7% rise from the previous year. These optimistic analysts’ projections underscore AMD's position as a leader in driving innovation in the AI computing landscape.

ServiceNow, Inc. (NOW)

ServiceNow, Inc. (NOW) excels in cloud-based platforms revolutionizing digital enterprise operations. Its AI-driven solutions empower businesses to streamline services efficiently, commanding a significant market presence. With more than 8,100 clients, including 85% of Fortune 500 companies, NOW's impact is profound.

In the fourth quarter of fiscal 2023, NOW showcased exceptional performance, reporting a remarkable 27% growth in subscription revenue and closing 70 deals exceeding $1 million. Moreover, platform workflows surged by an impressive 40%, underscoring its efficacy in enhancing operational efficiency and reducing costs.

The company’s fourth-quarter revenue increased 25.6% year-over-year to $2.44 billion, with non-GAAP income from operations seeing a 31.8% uptick from the year-ago value to $717 million. Additionally, its non-GAAP net income and net income per share came in at $643 million and $3.11, up 38.6% and 36.4%, respectively, from the prior year's quarter.

Moreover, NOW is forging strategic partnerships to integrate advanced analytics and AI capabilities to deliver tailored solutions. Strategic Collaborations with DXC and Amazon Web Services exemplify its commitment to innovation, ensuring industry-specific, AI-powered applications.

By expanding its alliance with EY organization and Visa Inc. (V), NOW is poised to revolutionize AI compliance, governance, and payment services. The acquisition of UltimateSuite further strengthens its automation and AI capabilities, driving operational efficiencies.

With continued generative AI advancements, NOW anticipates a promising 25% revenue growth in 2024, offering stability and long-term growth potential. Analysts predict the company’s revenue will grow 21.4% year-over-year to $10.89 billion for the fiscal year ending December 2024, with its EPS expected to total $13.09, marking a significant 21.5% rise year-over-year.

UiPath Inc. (PATH)

UiPath Inc. (PATH) operates within the burgeoning robotic processing automation (RPA) market, offering software solutions tailored to automate administrative tasks and optimize workflow processes. With a robust clientele exceeding 2,000 customers, each investing a minimum of $100,000 annually, PATH demonstrates its pervasive presence and appeal across diverse sectors.

Remarkably, PATH witnessed a 26% increase in its customer base year-over-year among clients spending at least $1 million annually, underscoring its widespread adoption among SMEs and major corporations. The trend aligns with the escalating demand for AI-driven solutions in recent years.

In the fourth quarter that ended January 31, 2024, PATH achieved notable financial milestones, with its total revenue surging by an impressive 31.3% year-over-year, reaching $405.25 million. This substantial growth was mirrored in its non-GAAP operating income, soaring by 59.6% compared to the previous year’s period, amounting to $110.52 million.

Furthermore, PATH's non-GAAP net income and non-GAAP net income per share rose 55.4% and 53.3% year-over-year to $128.51 million and $0.23, respectively.

PATH's recent attainment of authorized status within the Federal Risk and Authorization Management Program (FedRAMP®) also signifies a pivotal milestone, poised to expand the adoption of UiPath Automation Cloud™ Public Sector within federal government agencies. This accreditation reflects PATH's commitment to enhancing operational efficiencies through AI-driven automation, particularly within the public sector.

Additionally, the extended partnership between PATH and Google Cloud heralds promising prospects for customers seeking to embark on their automation journey. With PATH now available on Google Cloud Marketplace, clients can seamlessly access PATH's Business Automation Platform, leveraging Google Cloud's robust infrastructure to deploy and scale automation initiatives effectively.

As Wall Street anticipates a 19% year-over-year revenue surge to $1.56 billion for the fiscal year ending January 2025, coupled with a 7% growth in EPS to $0.58, PATH stands poised to capitalize on its innovative solutions and strategic partnerships, further solidifying its position as a frontrunner in the RPA landscape.

Bottom Line

The artificial intelligence (AI) sector's trajectory is remarkable, with the global AI market reaching $515.31 billion in 2023 and projected to soar from $621.19 billion in 2024 to $2.74 trillion by 2032, boasting a CAGR of 20.4%. This growth is fueled by increased AI applications, partnerships, small-scale providers, evolving business structures, and personalized service demands.

However, recent market volatility has prompted caution among investors, leading to a downturn in NVDA's stock. This vulnerability highlights the fragility of sentiment-driven gains, signaling a potential turning point for the stock. Meanwhile, alternative AI stocks such as MSFT, AMD, NOW, and PATH are poised for potential growth.

MSFT has demonstrated robust financial performance and technological innovation, while AMD's advancements in AI hardware and software position it as a leader in the field. NOW's cloud-based solutions and strategic partnerships offer stability and long-term growth potential, and PATH's success in the RPA market and strategic alliances underscore its promising future.

As investors reevaluate their portfolios amid NVDA's decline, these alternative AI stocks present diversified opportunities to capitalize on the industry's continued growth.