Summary
Super Micro Computer is rated a BUY. This is an opportunity for a 10x investment. Super micro is manufacturing computer data center products. Their growth is going exponential and they are still valued fairly for that growth. The competitive advantage is the energy efficiency of their products.
Understanding Super Micro as a Business
Super Micro Computer commonly known as Supermicro is a multinational company that designs high performance server and storage solutions for data centers, cloud computing, enterprise IT, and other applications. Supermicro offers a wide range of server and storage products, including server motherboards, chassis, power supplies, networking equipment, and complete server systems. They are known for their high-density, energy efficient server solutions.
GPU Servers: Supermicro has developed GPU-accelerated servers designed to support artificial intelligence (AI), machine learning (ML), and other data-intensive workloads. These systems leverage the power of graphics processing units (GPUs) for enhanced performance in scientific, research, and deep learning applications.
Blade Servers: Supermicro’s blade server solutions provide high-density computing, storage, and networking capabilities in a compact form factor. Blade servers are ideal for organizations looking to optimize space and reduce operational costs in their data centers.
Advanced Cooling Solutions: To address the growing challenge of cooling high-density server environments, Supermicro offers advanced cooling solutions that help data center operators maintain optimal temperatures while reducing energy consumption.
Supermicro is an AI play that isn’t overvalued. It has its own manufacturing facilities and makes its own products. The industries that they operate in are the most high growth opportunities such as 5G and AI. They are expanding their own operations globally to San Jose, Taiwan, and Malaysia. These moves demonstrate their commitment to growth.
Over 76% of Supermicro’s revenue comes from the United States. Only 3% of their revenue comes from China. This is important when considering geopolitical risks associated with most computer chip investments. The fact that they aren’t in Taiwan yet and aren’t getting a large part of their revenue means that they are not as ast risk as for example NVDA when China finally invades Taiwan.
Valuation Metrics
The finviz stock screener is a great tool to see performance metrics that are important to assess a company’s valuation.
Super Micro is valued as a $15 Billion company by market cap. They are currently trading at an earnings multiple of 25. The analysts on Finviz are expecting a growth rate of 10% for the next 5 years. This projection could be outdated because the company is guiding in its earnings report revenue growth of 70% per year. The valuation for earnings multiple seems to be meeting in the middle of these two different projections. If the analysts that finviz is reporting on are correct the earnings multiple could be considered high. If the company guiding its revenue growth is correct then its an inexpensive earnings multiple.
FAST Graphs Analysis
The FAST Graphs software is a powerful tool used to analyze the earnings of a company compared to the share price. The black line is share price and the orange line is earnings multiplied by 15. The blue line is the average PE ratio over the time frame plotted.
Super Micro is projected to grow exponentially. The current share price meets the fair value of the earnings multiplied by the growth rate. It is rare to see high growth rate companies trading at a multiple equal to the growth rate. The analysts that FAST Graphs gets its projections from are projecting more in line with company guidance. This is leading the stock to look at fair value based on the earnings multiple.
Bull Thesis
Super Micro has experienced exponential growth. The growth is going to continue because the industries that they are in are high growth industries. The current valuation for the company is fair or even undervalued for the growth they are experiencing. The data center businesses and the 5G business will demand the computer components they make. They have a focus on innovating their products to be the most energy efficient as they can. Energy costs are going to be an important aspect of the large computing centers. For example Bitcoin mining’s main cost was the energy costs to operate the mine. When companies want to operate large scale computing centers then energy costs are going to be a practical consideration.
Bear Thesis
The AI mania is just a mania that isn’t sustainable for the growth rate. They have seen the increased demand that they are going to see and it won’t go any higher. The competition for computer components is going to be very high. They are supply constrained currently and won’t be able to get the increased supply to sustain the growth rates. NVDA, AMD, and Intel won’t be able to increase their production capacities enough to supply Super Micro with the chips that they need. If the suppliers are constrained then they will raise prices. If the chip suppliers raise prices that impacts Super Micro’s profit margin negatively. There is still the looming threat of China invading Taiwan that could drastically limit the supply of computer chips making it impossible for Super Micro to meet the demand for their product.
Rating
Basil Leaf Capital rates SMCI a BUY. This company is experiencing exponential growth. This could be the opportunity to invest in a 10x company. AMD currently does $21 Billion in sales and trades at $150 Billion by market cap. Super Micro only trades at $15 Billion by market cap and will reach this level in sales based on their growth rate. The large computing centers and cloud networks will need super micro’s products. The competitive advantage that the company has is the energy efficiency of their products. When large centers are deciding what computers to buy, the energy cost consideration will be very important to customers.