Super Micro Computer: A Potential AI Giant Amidst Financial Reporting Concerns

Super Micro Computer's Stock Is Dirt Cheap Again (NASDAQ:SMCI)

Valuation ratios show SMCI as dirt cheap compared to AI peers like NVDA and AMD, with a DCF model suggesting a fair value nearly four times higher. My previous bullish thesis about Super Micro Computer's stock (NASDAQ:SMCI) was destroyed by the stock market as the stock nosedived by 49% since early June. As I have emphasized in most of my articles about SMCI, the stock is extremely volatile. I still do not recommend investing in SMCI for investors who are not ready to tolerate massive volatility. I am a long-term investor and prefer to allocate my capital to stocks with vast potential. I am ready to hold it for decades, meaning that dips like the recent ones create more buying opportunities. I prefer to look at businesses from a secular perspective, and SMCI definitely has strong potential. Moreover, the stock became dirt cheap once again after the recent dip. All in all, I reiterate my "Strong buy" rating for SMCI. SMCI peaked at above $1,200 in March 2024. The current price is around $413, which is almost three times lower. The stock is extremely volatile with the past 52-week range spanning from $227 to $1,229. The stock started experiencing a massive sell-off since mid-July, mostly due to the broader market's factors. This approximately aligns with the stock's historical seasonality patterns. The below bar chart suggests that the share price decline is likely to continue in September. The broader market's sentiment around growth stocks started deteriorating in mid-July when there was an outage of Microsoft's (MSFT) services due to CrowdStrike (CRWD) updating its cybersecurity software. Fears around growth stocks were also fueled by U.S. unemployment rate breaking through a psychological 4% level during Summer 2024. The market is a voting machine over the short term. Sentiment around further AI winners growth prospects has apparently cooled down after Nvidia's (NVDA) market cap surpassed $3 trillion. This is a massive psychological level for the entire market because none of the stocks ever rallied far above $3 trillion market cap. Therefore, it is not surprising that NVDA investors are taking profits when the company's market cap hits $3 trillion. Even the recent stellar quarterly earnings release did not help much. I think that the market needs to get used to the new reality where companies' market caps can go closer to $4 trillion before the rally resumes. Moreover, September is historically the weakest month for stocks. Therefore, SMCI's price might continue to stagnate over the next few months. As a long-term investor, I prefer to ignore the noise and short-term share price fluctuations. Let me better explain why I firmly believe that SMCI is still a strong investment opportunity based on fundamental factors. The industry of hardware for generative AI is still thriving. In July, Gartner has significantly upgraded its worldwide technology spending forecast. According to the report, generative AI is the primary reason for such a bullish outlook. Spending on data center systems is expected to grow by 24.1% in 2024 compared to 2023. Gartner's bullish outlook aligns with recent development around the industry. Amazon's (AMZN) AWS continues expanding its data centers network and yesterday shared information that the company will invest around 8 billion GBP in the United Kingdom. Asset management giants are also active pouring billions into data centers. For example, a consortium led by Blackstone (BX) will acquire Australia-based data center group AirTrunk in a deal worth over A$24 billion. Blue Owl Capital (OWL) also plans to invest billions in a JV that will develop data centers. Therefore, it is very early to think that investments in data centers is losing momentum. As a company with a strong technological partnership with Nvidia, the major AI winner, SMCI is poised to continue enjoying massive industry momentum. The company's revenue is soaring and has grown by around five times over the last five years. Consensus expects Nvidia's revenue to triple over the next decade. This bullish outlook is crucial for investors as there is an extremely strong correlation between NVDA's and SMCI's revenue growth. I became even more convinced that the strong correlation of the two companies' revenues' will persist after Jensen Huang described himself as Liang's [SMCI's CEO] long-time partner and Supermicro's "best sales guy". It is also very important that SMCI does not only concentrate on building strong relationships with NVDA. Super Micro Computer also promptly reacts on new chips releases from AMD (AMD) by introducing servers that are compatible with AMD's. SMCI also works closely with Intel (INTC) to ensure that its offerings are compatible with Intel's as well. Therefore, I think that SMCI is protected from the concentration risk related to Nvidia. With strong partnerships with all three leading AI chips companies, SMCI is well-positioned to capitalize on soaring investments in data centers. Some analysts became less optimistic about SMCI due to its gross and operating margins dropping in recent quarters. In my analysis, I also consistently emphasize that it is crucial for investors to check whether a company's profitability is moving in line with revenue. When profitability stagnates while revenue is growing, it might indicate that the business model is unsustainable. I believe that it is not the case for SMCI. First, the company is not a startup, and it has rich history of strong financial performance, meaning that the management is able to manage growth efficiently over the long term. Second, SMCI faced a sharp spike in demand for racks and the environment is rapidly evolving as Nvidia and AMD are in the fierce battle of releasing the most powerful AI chip of all time. Therefore, SMCI invested heavily in its infrastructure and capacity, R&D, and talent acquisition to address the rapidly evolving environment. I think that these investments are highly likely to pay off as the company is now well-equipped to capitalize on the AI strong momentum. SMCI rallied by 49% over the last twelve months and by 45% YTD. Valuation ratios are high compared to historical averages and the sector median. On the other hand, SMCI has strong AI exposure, which is not incorporated in historical averages. Moreover, not all sector companies have the same exposure to AI. Therefore, comparing SMCI's multiples to the sector median and historical averages appears to be unfair in current circumstances. Therefore, let me compare SMCI's valuation ratios to other hot AI stocks like NVDA and AMD. They are not peers or competitors, but all three are perceived as the major AI darlings. SMCI is not only cheaper than NVDA but also substantially cheaper compared to AMD, a company with revenue growth nowhere near SMCI's. Therefore, from valuation ratios, SMCI looks dirt cheap to me. I consider the discounted cash flow [DCF] approach to be the most reliable for aggressive growth stocks. SMCI's total debt is insignificant compared to its market cap. Therefore, I use the cost of equity as a discount rate. Cost of equity is calculated below using the CAPM formula. All assumptions for my CAPM calculations are publicly available on the Internet. Thus, the model will be discounted using a 10.72% discount rate. I rely on consensus revenue estimates, which are available for the entire next decade, projecting a 14.6% CAGR. On a TTM basis, SMCI's FCF margin was negative due to heavy investments in inventory to meet surging demand. Therefore, for the base year, I incorporate a zero FCF margin. The adjusted EPS is expected by consensus to jump by 52.3% in FY2025 and by 30.2% in FY2026. Therefore, I think that incorporating at least 100 basis points yearly expansion for FCF margin is conservative enough. With all these assumptions, my DCF model suggests that the business's fair value is $95 billion. This is almost four times higher than the current market capitalization, meaning that the stock is dirt cheap once again as it was in December 2023. My readers should be aware that SMCI's reputation is not perfect. In August 2020, the company paid $17.5 million SEC fine over alleged accounting violations. The recent report from Hindenburg Research included allegations of new cases of accounting manipulations, among other issues. The market's sentiment significantly deteriorated, especially after SMCI announced that it would not be able to file its annual 10-K report on time the next day after Hindenburg's report. Despite SMCI there was no official reaction from the company to Hindenburg's publication, I am quite skeptical about the report. Short sellers like Hindenburg are recording profits when stock prices plunge. Therefore, there is an apparent conflict of interests when such a company releases its bearish report. Another reason why I consider Hindenburg's report as noise is that JPMorgan Chase (JPM) noted that it saw "limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC, and limited new information relative to the existing and already known business relationship with related companies owned by the siblings of the founder of SMCI". I tend to believe more to official comments from the U.S. the largest bank that to the report from a company with a certain conflict of interests. Once again, I do not recommend investing in SMCI if an investor is not ready to hold the stock for several years and is likely to panic if temporary drawdowns occur. I have already mentioned that the SMCI's price range over the last year has been extremely wide, and not everyone is able to stomach such a roller-coaster. To conclude, SMCI is still a "Strong Buy" for long-term investors who are okay with substantial valuation. The company is firmly positioned and well-equipped to ride the AI wave, and the valuation is extremely attractive after the recent nosedive.

Super Micro: A Bull's View On This Unique AI Opportunity (NASDAQ:SMCI)

My DCF Model yields a target price of $649 per share for Super Micro. Super Micro Computer (NASDAQ:SMCI) has seen a major decline in the stock price recently, both due to the postponed filing of its 10-K annual report and a report published by Hindenburg Research. So, what do I have to say about it all? Nvidia CEO Jensen Huang has made statements recently, endorsing Dell (DELL) as an AI server supplier, a company that just got added to the S&P 500 index. Dell is not a bad alternative, but I believe that Super Micro shares will outperform that of Dell in the next few years due to several reasons, including its focus on green computing, short delivery time frames, and highly attractive operating margins. Before you rotate to Dell, also remember that Dell operates with approximately half the operating margins of Super Micro and that Dell is growing revenues no way near that of Super Micro. Super Micro increased revenues by over 100% in the last year alone, with Wall Street estimates suggesting another 70-80% in revenue growth for FY2025. Yes, Super Micro is currently in a phase of hyper-growth, and this is all taken into account by the bulls that are still left. Rosenblatt's analyst Hans Mosesmann is one of them, reiterating his buy rating for Super Micro with a whopping target price of $1300. I'm of a similar view, that the shares of Super Micro maintain a high intrinsic value and that the price of Super Micro will eventually retract to its former highs. If you truly want in on the AI server wave, I believe that Super Micro is best positioned to grasp this billion-dollar opportunity. The company is at the forefront of server technology, offering green computing with several solutions to reduce the energy consumption of data centers. They use shared fans and power sources, and they offer modular server solutions to reduce e-waste by up to 50%. Furthermore, they offer AI servers with liquid cooling, which is much more energy-efficient than using air. As you can see, Super Micro has a green business model that will help reduce climate impact. This is all very important as datacenters consume 2-3 percent of global electricity annually and this number is only expected to increase in coming years. Apart from green computing, there are several additional factors that will help boost growth for Super Micro: All in all, Super Micro remains one of the leading AI server suppliers out there, with a market share that is expected to nearly double in the coming years, reaching 17% by 2026 according to Bank of America. The financials of Super Micro are robust. Looking at its balance sheet, the company boosted with an equity-to-capital ratio of more than 50%. This offers a good source of capital to finance the company's investments in R&D. Turning to the Income Statement, it's obvious that Super Micro is doing well. Its revenues have been growing exponentially during the last 5 years, with a CAGR of 33.7%, which is far above that of its peers, and also reflected in the share price, while operating margins have improved and are well above their five-year average and so is the pre-tax and net profit margin of Super Micro. Also, in terms of management effectiveness both ROE, ROA, and ROI are at the higher end and all above their five-year average indicating improved management effectiveness. ROE is at a stunning 32.5% as of June 2024. Furthermore, the company has a quick ratio, current ratio, and debt-to-equity ratio far above that of the industry. Super Micro has no difficulties whatsoever in meeting its near-term financial obligations. For valuation purposes, I'm using a DCF model with revenue growth as the main input. For FY2025 I expect a revenue growth of at least 70% which equals a revenue of $25 billion. This is a defensive forecast made by me, which corresponds to the lower end of market expectations. The number is achieved by Super Micro as long as their quarterly revenues do not decline in the coming quarters, something I find unlikely. To predict revenue growth for the remaining four years, I consider the market forecast for AI servers, which indicates market-wide revenues of $194 billion by 2030. I match that with my forecast of Super Micro's market share, which I expect will be at least 20% in five years' time due to the company's strong product offering and track-record of taking market from its competitors. This gives us a AI server revenue forecast of approximately $40 billion in the final year of my DCF Model, while adding another few billions due to non-AI server sales. Cost of revenues (% of revenues): 88%, HedgeMix forecast based on Q4 2024 when it was at its historical high. We expect cost of revenues to stabilize around that level as increasing demand will provide for price hikes. Operating expenses (% of revenues): 3.5-5%, HedgeMix estimate. Decreasing OpEx according to economies of scale and in line with the historical trend. Capex: (% of revenues): 1%, HedgeMix estimate based on historical rates. NWC (% of revenues): 31-36%, HedgeMix estimate based on the assumption that inventories as a share of revenues will fall from their currently very high levels. D&A (% of revenues): 0%, based on insignificant historical rates. Stock-based compensation: $0, based on insignificant historical rates. Based on the above inputs, our DCF model yields a target price of $649 per share. The shares of Super Micro have already been trading above these levels. Furthermore, please note that the target price is based on a prediction of Super Micro's future cash flows discounted to their present value, i.e. their NPV. This means that the intrinsic value of the shares next year and the year after that will be significantly higher, assuming that the company maintains its trajectory of growth. Here is a summary of the main risks I see with an investment in Super Micro: Due to current market sentiment, it may take some time for the shares of Super Micro to retract to their former highs. However, I believe that soon enough, the shares of Super Micro will rebound. This assumption is based on several factors, relating to the solid financial health of the company, its economic moat, and the vast potential of the AI server market as a whole. Super Micro is perfectly positioned to benefit from the major market opportunity that artificial intelligence is offering. My target price for Super Micro is $649 per share, and I hereby issue a buy recommendation.

Does Super Micro Computer's Delayed Filing Change Its Investment Thesis?

The delay reminds investors of a critical but often forgotten risk of investing. One of the most profound disappointments of the recent Super Micro Computer (SMCI -1.58%) earnings report came from an unexpected source. The disappointment did not come from the earnings release itself. That showed that the massive growth earned from selling servers containing Nvidia's artificial intelligence (AI) chips had continued. Instead, it began when short-seller research company Hindenburg Research released a report alleging accounting irregularities with Super Micro. Soon after, Super Micro announced that it would delay the release of its 10-K for the fourth quarter of fiscal 2024 (ended June 30). The stock fell 19% in the trading session following that delay. Even though it has regained some of that lost value, it leaves investors questioning whether they should continue to invest in the Super Micro growth story or stay away. Making sense of the accounting issues Admittedly, the gut reaction of dumping stock in this type of situation makes sense from a certain point of view. Such actions leave investors wondering about the extent of any restatements Super Micro makes. As of now, nobody knows whether any possible restatements will be relatively meaningless, or whether they will radically change Super Micro's investment thesis. Indeed, this is difficult for me on a personal level. Considering its growth rate and potential for more growth, it became one of my favorite AI stocks. Hence, I bought shares when it became available at a more reasonable valuation. Nonetheless, just days after I bought Super Micro stock, I am now compelled to question my own investing call and advise risk-averse investors to pass on Super Micro. Additionally, the incident serves as a reminder of one critical reason why investing experts encourage diversification. Whenever shareholders invest in an individual stock, they face a remote but real possibility that the company has reported inaccurate numbers. This does not mean investors should assume that Super Micro is the next Enron, or even that the delayed filing will uncover inaccuracies. However, diversifying does limit the damage investors can face from a potential accounting irregularity at one company, making it a safeguard all investors should consider. The case for staying with Super Micro When incorporating such protections, investors can also make a case for buying Super Micro right now, assuming they can tolerate the risk. The most obvious benefit is the lower stock price. At around $385 per share as of this writing, it sells at a 68% discount from the $1,229 per share peak it set five months ago. It also sells at a price-to-earnings (P/E) ratio of 19. Assuming the fiscal Q4 figures stand when Super Micro finally releases the 10-K, the 82% increase in net income from year-ago levels means that's a low multiple, considering its massive growth rate. Moreover, despite the questions surrounding the upcoming 10-K report, Super Micro's rapid growth is likely genuine. After all, its partner Nvidia continues to report triple-digit revenue growth, primarily because of the popularity of its AI chips -- which often go into Super Micro's servers. That growth will probably continue. Allied Market Research predicts a compound annual growth rate of 38% for the AI chip industry through 2032. In fiscal Q4, Super Micro reported 143% revenue growth, far ahead of the expected industry growth. Considering Super Micro's critical support role in the AI realm, the company should continue to exceed that growth rate for years to come. Should I still invest in Super Micro stock? At current levels, Super Micro stock looks like a buy -- if you can handle the risk. Admittedly, the uncertainty surrounding Super Micro's filings should keep risk-averse investors out of the stock. More risk-tolerant investors should also avoid large Super Micro bets until it releases the delayed 10-K. However, Super Micro stock sells at a very cheap valuation, and the industry growth trends driving the stock are not in doubt. Assuming the company can move on from this uncertainty, its stock could surge significantly higher from current levels.