An analyst at Northland sees Super Micro stock soaring 34% as AI server demand continues to rise.
The company is growing rapidly, and a recent capital raise could fuel its growth ambitions.
The stock looks pricey, though, especially considering the server business is a low-margin affair.
After a meteoric rise over the past year fueled by the AI frenzy, shares of server manufacturer Super Micro Computer are starting to face some resistance. While the stock is still up more than 1,000% since the beginning of 2023, it's lost considerable ground in the past few weeks.
An analyst at Northland sees this dip as a bump in the road. Northland's Nehal Chokshi maintained an outperform rating on the stock while boosting his price target from $925 to $1,300 per share. That new price target is about 34% higher than where the stock trades as of this writing.
Market share momentum
Chokshi estimates generative AI could drive 20% gains to knowledge worker productivity, in turn fueling the long-term expansion of the AI server market to $560 billion. He sees Super Micro eventually controlling 16% of that large market.
So while Super Micro stock tumbled in response to the company's recent decision to raise about $1.75 billion through an equity offering, Chokshi views the capital raise as a positive since Super Micro has greater resources to invest in its sizable growth opportunities.
Is Super Micro stock a buy?
There's no question Super Micro is growing rapidly. Revenue more than doubled year over year to $3.7 billion in the company's most recent quarter as demand for AI servers exploded. The company expects to generate $14.5 billion of revenue (at the midpoint of guidance) in the current fiscal year (ending June 30, 2024) and sees a path to $25 billion in annual revenue.
However, investors must remember two things. First, this pace of growth won't last forever. And second, Super Micro operates in a highly competitive, low-margin industry. The company is quick to get products to market, giving it an edge as the AI industry rapidly evolves. But trading at a premium 45 times forward earnings, the stock could tumble at any sign of a slowdown.
