Supermicrocomputers still have a lot of upside potential.
Supermicro Computer (SMCI -0.60% ), better known as Supermicro, is one of the hottest artificial intelligence (AI) stocks on the market: The company’s shares have risen 2,290% over the past three years as sales of its AI servers soared.
But Supermicro is a polarizing stock among analysts: Susquehanna’s Mehdi Hosseini sees it falling 60% to $325, while Loop Capital’s Ananda Baruah sees it rising 84% to $1,500. Can it really reach the Street’s highest price target?
Image source: Getty Images.
How fast is Supermicro growing?
Supermicro has a much smaller share of the traditional server market than Dell Technologies (DELL 0.36%) or Hewlett Packard Enterprise (HPE -0.92%), but the company has carved out a niche for itself by selling high-performance servers.
This focus made Supermicro an ideal partner for Nvidia (NVDA -2.61% ), initially granting it access to Supermicro’s high-performance data center GPUs before larger competitors. The partnership gave Supermicro a first-mover advantage in AI servers, and growth in this business has accelerated over the past few years as the AI market has expanded.
From fiscal year 2019 through fiscal year 2021 (ending June 2021), Supermicro’s revenue grew at a sluggish compound annual growth rate (CAGR) of less than 1% as the company struggled with disruptions from the pandemic and supply chain constraints. However, from fiscal year 2021 through fiscal year 2023, revenue grew at a CAGR of 42% and EPS soared at a CAGR of 134%.
This acceleration is driven by strong sales of dedicated AI servers, which will account for roughly half of the company’s revenue by the end of fiscal 2023. Bank of America projects Supermicro’s share of the AI server market will rise from 10% in 2023 to 17% in 2026, as the overall market expands by 150%. Research and Markets projects the global AI server market will grow at a compound annual growth rate of 26.5% from 2024 to 2029.
Analysts expect Supermicro’s revenue and EPS to grow at compound annual growth rates of 58% and 52%, respectively, from fiscal 2023 through fiscal 2026. That’s an impressive growth rate for a stock that trades for just 27 times next year’s earnings.
Bulls and Bears
Bulls believe Supermicro will maintain its first-mover advantage in the AI server market, continue to grow its market share, and expand beyond Nvidia-powered AI servers through new deals with AMD and Intel.
Loop Capital said in its most recent investor note, published in April, that Supermicro’s business “remains healthy” and should benefit from the expanding AI market. Loop Capital also co-managed Supermicro’s $1.7 billion senior unsecured convertible notes in February, which may give it better insight into the company’s core business than other Wall Street firms.
Assuming Supermicro meets Wall Street expectations and trades at 27 times forward earnings, the company’s shares could reach nearly $1,100 by early fiscal 2026. To reach $1,500 by then, the stock would need to trade at about 37 times forward earnings. That’s not too expensive for a high-growth AI stock, but it’s a bit pricier than traditional server makers like Dell and HPE, which trade at 24 and 13 times forward earnings, respectively. If Supermicro’s growth slows unexpectedly and the company is reassessed as a traditional server maker again, the stock could fall sharply.
Bears believe that could happen for two simple reasons. First, competition from Dell and HPE, which are expanding their AI server businesses, could limit Supermicro’s growth and drive down its margins. The Supermicro-Nvidia partnership is also not exclusive, with major competitors buying many of the datacenter GPUs. Second, the overall AI market could gradually cool, and that slowdown could be exacerbated by increased regulation, geopolitical tensions, and export restrictions.
Do you think Loop Capital’s target price is reasonable?
While I am optimistic about Supermicro’s future, I don’t see it reaching $1,500 within three years. I believe the company’s strengths outweigh its weaknesses, but in this volatile market, an average price target of just over $1,000 seems more reasonable. In the long term, Supermicro could surpass $1,500 if it maintains its lead in liquid-cooled high-end servers and expands its share in the AI server market. That said, investors should be prepared for big volatility until the company reaches that target.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Bank of America, and NVIDIA. The Motley Fool recommends Intel and has recommended buying Intel’s January 2025 $45 calls and selling Intel’s August 2024 $35 calls. The Motley Fool has a disclosure policy.
