Super Microcomputer (NASDAQ:SMCI) The company has been one of the hottest artificial intelligence (AI) investments this year, with its shares soaring more than 300% from the start of the year through mid-March, before falling about 30% and remaining roughly stable since the end of March.
So should investors consider this successful, but dormant AI stock? After all, this stock was one of the market's best-performing at the start of the year.
Supermicro is in a much more competitive field than Nvidia.
Supermicro Computer (often just called Supermicro) makes servers and data center components, an industry that is clearly benefiting from the AI arms race, which is essentially the same trends that are driving AI. NVIDIA As a result, investors saw this as a second chance to buy into Nvidia after missing out on the stock in 2023 (although Nvidia is up more than 150% so far in 2024).
If you came up with that idea on New Year's Day and executed it the next trading day, you'd still be beating Nvidia, but that situation may not last long given Nvidia's steady rise.
But why has Supermicro stagnated for so long? A big reason is that it has to live up to high expectations. After Nvidia announced several consecutive quarters in which its revenue tripled, investors expected Supermicro to be subject to the same trend and post similar numbers.
But that was a flawed analysis, as Supermicro competes in a much more competitive industry. Dell and Hewlett-PackardSupermicro has a lot of work to do, and their key differentiator is the ability to customize their servers, tuned for any workload and size.
This makes Supermicro still a top choice in this space, but it's not the cheapest.
Another factor in Supermicro's relatively slow growth is that its largest customers may be manufacturing some of their servers in-house, and while they still source some components from Supermicro, it's not the same as buying everything from the company.
All of these factors combined to cause incredibly high expectations to fail to be met, and investors sold off shares from the highs as reality set in. But did they go too far?
Stock prices remain high
In its fiscal third quarter earnings call, which ends March 31, 2024, management reiterated its long-term goal of achieving $25 billion in annual revenue. Given its fiscal 2024 revenue guidance of $14.7 billion to $15.1 billion, Supermicro still has a long way to go.
But what happens if that goal is achieved?
If Supermicro can make $25 billion a year in revenue at its current profit margins (10.5%), that would result in hypothetical annual revenue of $2.63 billion.
Now, if we divide the current market cap by its earnings, we get a price-to-earnings (P/E) valuation. This calculation gives us a P/E of 18.8, which is not a bad price for the stock. At the peak of Supermicro's stock price in mid-March, this calculation gave us a P/E of 25.6, which was much higher.
So is this a price worth paying? No, I don't think so. Everything has to go right and sustain for this prediction to hold. Any downside invalidates this analysis and makes it a bad investment. With so little margin for error, I would not buy Supermicro stock, even if the company has a good chance of continuing to be successful.
Should I invest $1,000 in Super Micro Computer right now?
Before buying Super Micro Computer shares, consider the following:
of Motley Fool Stock Advisor The analyst team Top 10 Stocks Here are the stocks investors should buy right now… Supermicro Computer wasn't one of them. The 10 stocks selected have the potential to generate huge profits over the next few years.
Things to consider NVIDIA This list was created on April 15, 2005…If you invested $1,000 at the time of recommendation, That comes to $757,001.!*
Stock Advisor With portfolio construction guidance, regular updates from our analysts, and two new stock picks every month, we provide investors with an easy-to-follow blueprint for success. Stock Advisor The service is More than 4 times First S&P 500 recovery since 2002*.
View 10 stocks »
*Stock Advisor returns as of June 24, 2024
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.
The article Artificial Intelligence (AI) Superstar Supermicro Computer: Down 30% from All-Time High, Should You Buy It? was originally published by The Motley Fool.
