Super Micro Computer: I Was So Wrong About This AI Compounder (Upgrade)

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Super Micro Computer: I Was So Wrong About This AI Compounder (Upgrade)

seekingalpha03-24

I was wrong previously about Supermicro, as I underestimated its near-term AI growth inflection.The company's success is closely tied to its partnership with AI chips leader Nvidia, and it has ...

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nywles
·03-25
Thanks
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Magus007
·03-24
Why not the usual share split?
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USD","BK4543":"AI","IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC","LU0109392836.USD":"富兰克林科技股A","BK4141":"半导体产品"},"translate_title":"超微计算机：我对这个人工智能复合器（升级）大错特错","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMCI":1,"NVDA":1},"content_text":"I was wrong previously about Supermicro, as I underestimated its near-term AI growth inflection.The company's success is closely tied to its partnership with AI chips leader Nvidia, and it has outperformed Nvidia in terms of total return.Supermicro's rapid go-to-market motion has allowed it to gain market share rapidly.I explain why SMCI is still not aggressively valued and has more upside potential.The recent pullback has offered investors a superb opportunity to gain more SMCI exposure.JHVEPhotoI Was Wrong About SupermicroTo say that I was wrong about my cautious thesis on Super Micro Computer, Inc. (NASDAQ:SMCI) in early December 2023 is an understatement. SMCI buyers tossed aside my Hold rating as the leading data center rack solutions provider provided a significant upgrade to its outlook at Supermicro's fiscal second-quarter earnings in late January 2024. As a result, I admit that I've completely misjudged Supermicro's near-term AI growth inflection. The company's marked guidance improvement also led to substantial target price upgrades by analysts post-earnings, as Wall Street turned strongly bullish on Supermicro's projections.Observant investors will likely agree with me that Supermicro's prospects are closely intertwined with AI chips leader Nvidia (NVDA). However, SMCI has easily outperformed NVDA, as the former delivered a total return of more than 800% over the past year. The winner is clear compared to NVDA's total return of about 255% over the same period.Supermicro's ascent to the top of its peers has gained prominence in the market. Even the Wall Street Journal likely felt it was timely to write a report about the Charles Liang led company, describing Supermicro as a previously \"obscure server maker.\" I believe loyal SMCI holders likely don't concur with the characterization, as Supermicro has worked on its go-to-market and technological advantage with Nvidia for some time. As a result, Supermicro has been able to push out leading customized products to capitalize on Nvidia's most advanced GPU technologies.Of interest is Nvidia's recent GTC, where the leading AI chip designer showcased its advances with its Blackwell chip architecture. Supermicro quickly capitalized on the GTC event, introducing \"new AI systems for large-scale generative AI featuring Nvidia's next generation of data center products.\" As a result, I believe Supermicro has justified the market's expectations about being the preferred supplier of AI rack solutions for downstream customer needs.Supermicro reported a revenue contribution of 37% linked to two cloud service providers in FQ2. As a result, Supermicro investors must be aware of the concentration risks associated with the exposure to hyperscalers demand. However, SMCI bulls could argue that it also demonstrates the hyperscalers's conviction about Supermicro's ability to offer top-notch AI rack solutions for their needs. In the intensely competitive battle between the CSPs, Supermicro seems well-positioned to ride on its leadership advantage against its slower ODM peers. Furthermore, the company reported revenue exposure of just 1% for other verticals such as emerging 5G, telco, edge, and IoT. As a result, I believe there are significant opportunities for Supermicro to leverage as it expands its TAM to other enterprise growth vectors.Is SMCI Stock Overvalued?SMCI Quant Grades (Seeking Alpha)Seeking Alpha Quant assigned SMCI a \"C-\" valuation grade, suggesting a reasonable valuation. SMCI's less-than-stellar \"B-\" profitability grade shouldn't cause undue concerns among investors. Supermicro management highlighted on its FQ2 earnings conference call that it will manage its pricing strategically to capture market share ahead of competitors. While it could lead to near-term margin pressure, Supermicro is confident of long-term operating leverage gains as it scales. In addition, the company will shore up its working capital buffer to account for the inventory surge as it attempts to meet high demand amid a supply-constrained environment.In addition, Supermicro's ability to raise funds recently through a $1.75B equity offering for $875 per share has positioned it well ahead of its peers. While the dilution risk led to a recent decline, I believe the ability to offer shares at a relatively higher valuation demonstrates the market's confidence in Supermicro's ability. SMCI is valued at a forward adjusted EBITDA of 24.3x compared to its technology hardware peers' median of 10.9x (according to S&P Cap IQ data). As a result, I believe the premium valuation has given Supermicro a massive lead in raising the necessary funding to compete against its peers, as it aims to maintain its go-to-market motion in delivering the most updated and advanced AI rack solutions.Is SMCI Stock A Buy, Sell, Or Hold?I believe Supermicro is well-positioned to maintain its leadership ahead of its hardware peers. However, that lead isn't insurmountable. While Supermicro has gained an advantage in the CSP space, the enterprise space could be more challenging as Supermicro manages more intense competition against the ODMs, which have a strong presence in that vertical. Moreover, the nascent verticals outside of the cloud and data center segments are still developing. It's an area where Supermicro hasn't demonstrated dominance, suggesting its leadership is far from secure.However, developing more powerful AI models could also lead to a surge in medium-term AI rack solutions demanded by the CSPs, even as spending is expected to broaden. As a result, Supermicro could see a more robust revenue growth trajectory over its current $25B target. I believe there's little doubt that the market expectations for Supermicro are high, and we need Liang and his team to deliver impeccably.Notwithstanding the caution, SMCI seems well-poised to maintain its leadership through its rapid GTM speed. I view the recent pullback as an opportunity for investors to gain more exposure if they haven't. This rally may be far from over. A more pronounced pullback should be capitalized with more aggressive dip-buying.Rating: Upgrade to Buy.Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.I Want To Hear From YouHave constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":287929857818880,"gmtCreate":1711318047498,"gmtModify":1711318049453,"author":{"id":"3555362771681553","authorId":"3555362771681553","name":"nywles","avatar":"https://static.tigerbbs.com/a7e6473ec2cec348d167d7d95fbdb76c","vip":1,"crmLevel":8,"crmLevelSwitch":0,"idStr":"3555362771681553","authorIdStr":"3555362771681553"},"htmlText":"Thanks&nbsp;","listText":"Thanks&nbsp;","text":"Thanks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/287929857818880","repostId":2421585603,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":287713127395336,"gmtCreate":1711265051072,"gmtModify":1711265054952,"author":{"id":"3586467434349014","authorId":"3586467434349014","name":"Magus007","avatar":"https://static.tigerbbs.com/182f01b189bd6df92a2f8b8b4e48dea2","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"3586467434349014","authorIdStr":"3586467434349014"},"htmlText":"Why not the usual share split?","listText":"Why not the usual share split?","text":"Why not the usual share split?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/287713127395336","repostId":2421585603,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":6,"commentSize":2,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}