How Super Micro Computer Stock Can Rise 2.5x To $1,000

Super Micro Computer stock (NASDAQ: SMCI) has had a solid run, rising by almost 7x over the past two years from levels of about $60 per share in September 2022 to about $410 presently, driven by surging demand for server systems led by the generative artificial intelligence wave. The stock has seen a selloff in recent months, amid concerns about its gross margins, some supply chain issues, and the company’s delay in filing its annual report on form 10-K with the SEC, after short-seller Hindenburg Research accused the company of irregularities with its accounting.

Super Micro stock trades at just about 18x trailing earnings and 12x forward earnings at the current price level. Is this a reasonable multiple? Sure is!  Especially if you consider the fact that the company’s earnings have the potential to grow by almost 5x from FY’24 levels in the next few years. While we note that the ongoing compliance-related matters present an overhang over the stock,  we outline a path for the stock to rise to levels of about $1,000 per share in the next few years by looking at the company’s potential revenue growth, net margins, and its price-to-earnings multiple. Can Super Micro stock fare better than AI bellwether Nvidia?

SMCI Has Done It In The Past

SMCI stock has generated better returns than the broader market in each of the last 3  years Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SMCI see a strong jump?

Why Revenue Growth Could Remain Better Than Expected 

Super Micro Computer is a data center solutions provider, which sells server systems, server boards, storage, networking solutions, management software, and installation and maintenance services. SMCI is projected to grow its revenue by close to 90% in FY’25 (the current fiscal year) to levels of about $28 billion, per consensus estimates, as data center-related spending remains strong, as tech companies boost their AI and accelerated computing capacity. However, growth is expected to slow meaningfully from the next year onward as demand for AI is expected to ease amid economic uncertainty and a greater focus on returns on investments by big tech companies. Consensus estimates project that SMCI’s sales could grow by about 18% to $33 billion in FY’26.

However, there is a possibility that sales could grow at a stronger pace. AI models are increasingly multimodal, moving from just text processing to working with speech, images, video, and 3D calling for higher computing power and consequently higher demand for servers and computing capacity.  Although the server market is commoditized, Super Micro does have some competitive advantages, given that its products are seen as being more customizable and more energy efficient than rivals. Super Micro’s customers are also likely to opt for more premium products. For example, the company estimates that costly liquid-cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of server racks it ships next year. The company is also steadily boosting its production capacity. For example, it is building out a new facility in Malaysia that can produce over 5,000 racks of server kits every month. If the company can grow its sales by about 35% each year over FY’26 and FY’27, it could take its revenues up by levels of 3.5x versus FY’24 to about $52 billion by FY’27.

Looking for more companies that can benefit from increased digitization and AI deployment? See our analysis of Internet Infrastructure Stocks

Margins Could Expand As Supply Chain Issues Ease

Combine this better-than-expected revenue growth with the fact that Super Micro’s adjusted net margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory – they grew from levels of about 6% in FY’22 to about 9% in FY’24 as the company sees better economies of scale and a more favorable product mix skewed toward more premium products. Although the company has seen its gross margins face some pressure in recent quarters as it sells a higher mix of liquid-cooling systems, which are proving expensive to produce, things could pick up as it eventually builds out a more efficient supply chain for these servers. Moreover, the company is likely to expand its key fixed costs such as research and development and selling and general expenses at a slower pace than its revenues and this could improve margins further. Considering this, it may be reasonable to assume that Super Micro’s adjusted net margins could improve by at least 1.4x to about 12.5% by FY’27.

Valuation Multiple Could Contract At A Slower Pace

If revenues grow by about 3.5x between FY’24 and FY’27, with margins expanding by about 1.4x over the same period, this would imply that earnings can grow by around 5x. Now if earnings grow 5x, the P/E multiple will shrink to a fifth of its current level, assuming the stock price stays the same. But that’s exactly what Super Micro investors are betting will not happen! If earnings expand 5x over the next few years, instead of the P/E shrinking from around 18x presently to under 4x, we think that the multiple could stand at about 9x.  This could make a 2.5x rise in Super Micro stock a real possibility in the coming years – with the stock rising to levels of about $1000.  What about the time horizon for this high-return scenario? In practice, it won’t make much difference whether it takes 3 years or 5 – as long as Super Micro is on this revenue expansion trajectory, with margins trending up, the stock price could respond similarly. Has Super Micro’s risk-to-reward trade-off been superior to the S&P 500? See our analysis of Super Micro Computer Sharpe Ratio

And it could be a bumpy ride yet again. While there is certainly a case to be made for large long-term gains from SMCI stock, the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

[1] Returns as of 9/10/2024
[2] Cumulative total returns since the end of 2016

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