By Dan Gallagher
Super Micro Computer's artificial-intelligence boom is real enough. Its booming stock price also seems to be discounting some more difficult realities, though.
The company more commonly known as Supermicro made a big splash when it joined the S&P 500 last week. Even before being added to the index, its stock had more than tripled since the start of the year and risen by more than 1,000% in the past 12 months. That far and away beat anything else on the index, including AI titan Nvidia.
The surge isn't without some justification. The $3.7 billion in revenue that Supermicro reported for its fiscal second quarter ended December was a record and double what the company reported in the same period last year. It also beat Wall Street's consensus forecast by 21% -- the largest beat the company has delivered in at least five years, according to data from FactSet.
Supermicro used the occasion to raise forecasts for its fiscal year ending in June for the second time. The company now expects revenue for the year of about $14.5 billion at the midpoint of that guide. It had been projecting about $10.5 billion in annual revenue six months prior.
That growth is no flash in the pan. Supermicro specializes in the types of high-performance servers that use Nvidia's GPU chips to power generative AI capabilities in data centers. Demand for those capabilities is strong and likely to remain so for a while; tech giants Microsoft, Google, Amazon and Meta have all publicly committed to devoting more capital expenditure toward AI infrastructure this year. Nvidia's data-center revenue is expected to nearly double to $93.6 billion this year and hit nearly $117 billion next year.
Propelled by the same trends, analysts expect Supermicro's revenue to top $20 billion in the fiscal year ending in June of 2025 -- four times what the company was producing just two years ago.
But for Supermicro, servicing that growth comes at a high cost. The company's business model involves buying up components such as Nvidia's expensive GPU processors early in order to quickly design and assemble customized servers for large customers. Just two buyers represented 36% of the company's net sales in its most recent quarter. Supermicro burned a record $610 million in cash in its most recent quarter, and free cash flow has been negative in five of the last 10 fiscal years.
That has necessitated some return trips to the capital markets; Supermicro sold $1.5 billion worth of stock in a public offering last week after moving $550 million worth of shares in December. The company also completed a debt sale worth $1.5 billion last month. Susquehanna analyst Mehdi Hosseini says the AI server market will demand increasing levels of customization in the future.
"This is expected to further increase working capital requirement and reduce (free cash flow) as Supermicro is expected to build various SKUs for each AI architecture," he wrote when downgrading the stock to a sell rating in December.
Competition is also picking up sharply -- most notably from Dell. The IT equipment and services giant said in its most recent earnings call that its backlog of AI server orders doubled in just three months' time. Dell has much greater financial resources -- its free cash flow was nearly $6 billion in the most recent 12-month period -- and a wider base of products and services it can bundle. Dell also seems to have a solid relationship with Nvidia.
"Nobody is better at building end-to-end systems of a very large scale for the enterprise than Dell," said Nvidia Chief Executive Jensen Huang during his high-profile keynote address last week.
Analysts from Goldman Sachs and JP Morgan, both of whom initiated coverage on Supermicro this month, think the rapidly expanding AI server market still leaves plenty of room for the company to grow. But, even with the stock about 14% off its high from two weeks ago, Supermicro's shares trade around 37 times forward earnings. That is nearly triple its three-year average and on par with Nvidia's current multiple. The chip maker's multiple is 10% below its own three-year average, though, because of the explosive earnings growth driven by its AI chips. Dell, whose stock has surged 45% this year, fetches less than 15 times forward earnings.
Goldman's Michael Ng thus set his rating for Supermicro at neutral, calling the shares "fairly valued." The percentage of analysts who rate the stock as a buy has fallen from 83% at the start of the year to 67% currently, according to FactSet.
At its current price, Supermicro still has some selling to do.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
March 28, 2024 06:00 ET (10:00 GMT)
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