Super Micro Computer and GigaCloud: Tech Stocks with Promising Potential

Super Micro Computer: A Gift (NASDAQ:SMCI)

This idea was discussed in more depth with members of my private investing community, BAD BEAT Investing. Learn More " Super Micro Computer, Inc. (NASDAQ:SMCI) stock tanked following its recently announced fiscal Q4 earnings. This if a stock was a gem reserved for our investing group, and admittedly, we have had members in this name since $225, shaving profit over $1,000, and then getting behind the name again as it hit $500. Shares have recouped some recent losses from the earnings and the chip sector correction, but $600 is still a fine price to pay for the growth on display. With that said, we were surprised by the margin pressure, but the stock is trading at a very attractive 18X FWD earnings, which is an exceptional price. The selloff, in our opinion, is an overreaction. While we have a number of options strategies to keep the income flowing, simply holding bought premium or the commons has led to heartache if you were a buyer before the selling began (e.g., buying at $800, $900, or even over $1,000) We will get right to the point. The quarter was mostly strong, but there were some hints of weakness in profit power, which spooked the market. But still, there was a pretty solid outlook. Why do we view this selloff as a gift? Well, it is not every day you see a 50% correction from a peak, we would argue there was some mean reversion, but there is upside in the stock. If you can get it sub $600 again, it is a solid entry. We do not need to sprinkle you with a ton of the earnings details, which you can find anywhere, but a few key points are most notable. First, while performance in the quarter mattered, what matters more is where the company is going. So guidance had everyone on edge, and it was strong guidance. Some anxiety, of course, stemmed from the margins. But the guide is what causes us to get bullish after the selloff. For fiscal Q1 2025 ending, the guide was for net sales of $6.0 billion to $7.0 billion, GAAP net income per share of $5.97 to $7.66 and adjusted net income per diluted share of $6.69 to $8.27. Let us look at the midpoint here. $6.5 billion in sales and $7.48 in EPS would imply some serious growth. Last year in fiscal Q1 sales were $2.12 billion and EPS was $3.43. So folks, we are talking about tripling sales from a year ago, and more than doubling EPS at the midpoint of guidance. So at 18X FWD, we view this projected growth as some strong value to buy even at today's prices. Now, the company, of course, does offer a lot of stock-based compensation to retain talent, and will be in the $40 million range in the quarter, a slight negative. Now, for the whole fiscal year, the guide was for net sales of $26.0 billion to $30.0 billion. Therefore, $28 billion at the midpoint would represent growth of nearly 88% from $14.9 billion in fiscal 2024. For earnings, assuming margins are at least what they were in fiscal Q4 (which we will touch on below), we see fiscal 2025 EPS of $35. This would be nearly 60% growth. So why did this quarter spook the market? Perhaps it was more of a surprise than anything. Net sales of $5.31 billion grew from $3.85 billion in the sequential fiscal Q3 2024 and was up from $2.18 billion in the same quarter of last year. However, the big reason for share weakness was a nearly unacceptable margin print. It was a huge negative and astounding. Gross margin dropped, shocking the Street, to just 11.2% in fiscal Q4. This was down 320 basis points from 15.5% in the sequential Q3 2024 down 580 basis points from 17.0% in the same quarter of last year. The company needs to do better on margins, there is no way to sugarcoat it. With the lower gross margin, earnings were less than expected. Net income was $353 million versus $402 million in the sequential Q3 2024, but up from $194 million a year ago. Adjusted EPS was $6.25 versus $6.65 in the sequential quarter, and $3.51 a year ago. Now, look, there is certainly some seasonality in the business. Make no mistake. We are also in a seasonally weak period for stocks, which could result in the stock pulling back under $600 again ahead of the upcoming stock split, which will be 10 for 1. We also think watching cash flows is noteworthy, as cash flow used in operations in the quarter was $635 million. So, we had a quarter of growth from last year, but sequential declines caused anxiety. We believe the gross margin is the key to watch, as it as the key reason for the declines in earnings power sequentially. However, at this point, with the strong guidance, we have a good combination of growth and value. What do we mean? Take a look at the growth and value quants. The numbers speak for themselves. With the decline in share price, the value metrics have returned to being very attractive versus where they were 2 months ago. In short, it is attractive, Price to sales of just 1.3X FWD, with 18.3X FWD consensus earnings expectations. This is really attractive when you consider the growth. EV to sales also 1.32X is phenomenal value in our opinion. The PEG ratio of just 0.4. This is a solid combination of fundamentals. Of course, we are not without risk. Margins continue to be a source of anxiety. The big question is whether this is a one-off or a trend that will continue. 580 basis points of margin erosion is an orange flag. Not a red one, but not yellow either. It is bearish. Further, if AI ends up being all it has been pushed to be, we could see a sudden slowing in demand. We also think political back and forth could hurt demand or prospects for AI-related spend from companies. Added government regulation, or controls, are always in play. Competition may play catch-up, too, longer-term. All things considered, however, we view this massive correction as a gift. While the price is not as attractive as it was when we were discussing the quarter when the stock was sub-$500 with our members, $600 is still an attractive price to pay. We would love to hear your take, especially bearish ones. Is this selloff justified? Are you employing options approaches? Is this just an AI fad that is going to continue to fade, or do you see it as a wonderful buying opportunity like we do? Let the community know below.

GigaCloud Is An Amazing Business On Sale (NASDAQ:GCT)

In all those years there's only two times [Charlie] told me that this one is really [amazing]... He would always go along with me and say... 'Well, this is not really all that great, but it's probably the best you'll come up with. But, Charlie twice pounded the table and said, 'Buy, buy, buy'... Looking back... I should have been more aggressive. Warren Buffett, 2024 Annual Shareholder Meeting Buffett has said that you only need a few companies to really get rich. When you see a business that you understand and is really amazing, you should really go for it. When I look at GigaCloud I see an amazing business that is on sale. I get the feeling of 'Buy, buy, buy.' In this article, I will explain why, using the investing framework laid out by Phil Town in RuleOne Investing. He is an investing teacher who provides a Buffett-style framework for investing. GigaCloud (NASDAQ:GCT) is a B2B service provider helping facilitate the 'big and bulky' market. On the one side are manufacturers that make big and bulky items like furniture, car winches, pet strollers, and many more. Many of these manufacturers are in China, but not all. On the other side are sellers, who are really resellers. These resellers take the GigaCloud products and sell them through their own channels. The performance of these resellers drives GigaCloud's 3P Service revenue segment. In the middle is GigaCloud, which facilitates these transactions on its marketplace. They have an end-to-end logistics solution. For a reseller, this is a dream. Imagine you are a furniture drop shipper in the US. You operate a website, look for SKUs on AliExpress, and run ads on Facebook. Generally, resellers in the US have a logistical nightmare on their hands. You have to deal directly with a manufacturer handling negotiations and contracts; you have to deal with customs and shipping; you have to deal with third-party warehousing. GigaCloud provides a 'point and click' solution for all these headaches. I've spent some time in the drop-shipping world. What's really amazing about GigaCloud is the big and bulky aspect. Drop shippers prefer small and lightweight products, it is one of the 'rules' to successful drop-shipping. GigaCloud is opening new markets for these resellers by providing simple and usable solutions for large parcels. Further, GigaCloud's logistics is powered by AI software, which optimizes their inventory location and pricing solutions. As of their last quarter, they have 7,257 active buyers, that is resellers, that sell an average of $151,276 per year from the GigaCloud market. These are not large business customers; these are the army of little drop-shippers who are trying to make a new business. Below is a picture of their marketplace. GigaCloud has two other segments. In its 1P segment, GigaCloud sells its inventory through third-party platforms like Amazon, Walmart, and Wayfair. This segment is currently their largest. They also have a segment where they sell big and bulky items through brick-and-mortar retailers. GigaCloud had a few businesses before 2019, but they launched the GigaCloud B2B Marketplace in 2019, which is their main business now. To get a sense of the business's growth, we can look at a few metrics. The first is GMV, the "total gross merchandise value of transactions sold through." In five years they have grown their GMV from $92 million to $784 million, a 53.8% CAGR. The second metric is the number of merchants selling on their marketplace. This number has been steadily increasing over time. They have grown this number from 565 in 2019 to 5,010 in 2023, a CAGR of 54.7%. The third number is the average spend of merchants, and this number has also been steadily increasing over time. In the same period the average spend has increased from $37,781.24 to $158,569.00, a CAGR of 33.2% Together, the two numbers signify that GigaCloud has the ability to retain and grow buyers who represent repeat and growing business. Their customers are businesses seeking to grow, and GigaCloud is a tool for them to facilitate their growth. As a result, their GMV is growing. Further, we can see that GigaCloud's 3P service revenue is growing at a CAGR of 34.9%. Finally, the 1P revenue is also growing fast, though not as fast at a CAGR of 25.1%. Taking all this together, GigaCloud has a business model that is growing fast, and it looks like it should continue growing. Their numbers through 2024 have been excellent. They are expanding rapidly, adding new warehouses each year, including a new 10 million square feet this year. Further, they have lots of room to grow. They are currently only operating warehouses in 5 US states, and four other countries (Canada, England, Germany, and Japan). If this business model is working well, they should be able to expand in the coming years. Businesses that have a durable competitive advantage are the best long-term investments. Historically, they are proven by the big four growth numbers, growth in revenue, income, book value, and cash from operations. GigaCloud is growing all four. The revenue has grown at a CAGR of 41.9%. Their income has also been growing well with a CAGR of 100.6%. However, there has been some lumpiness that requires explanation. Will the income continue to grow? In 2021 and 2022 their income margins suffered because of the spike in shipping rates, due to the crazy supply chain issues. GigaCloud is a logistics company and this was a difficult time for them. I believe that GigaCloud will continue to have strong income growth in the future. GigaCloud has grown its cash from operations at a whopping rate of 156.6%. This graph shows the same lumpiness as the income graph. Together, these numbers demonstrate that GigaCloud has historically grown very well and will most likely retain a durable competitive advantage in the future. This moat demonstrates that though the industry had a 7% decline in the last year, due to the slowdown in the housing market, GigaCloud maintained robust growth. GigaCloud's management is led by the founder, Larry Wu. Phil Town evaluates managers based on their capital allocation. In particular, GigaCloud has a great ROE, at 33.2% TTM. I have a chart of their TTM ROE, which looks to stabilize around 30%. Further, GigaCloud has no debt on the books, which is very comforting. They have operating leases, which is a form of debt, to support opening new warehouses. These leases stand at $440.8 million, which is less than 4X their TTM income of $113.9 million. GigaCloud has received several awards recently, including Ernst and Young Entrepreneur of the Year, and the Silver Stevie Award. They also joined the Russell 2000 recently. Phil Town provides three ways of evaluating the true value of a company. In GigaCloud's case, they all say that the company is definitely on sale. We begin by estimating future growth. Seeking Alpha says that analysts predict that the revenue will grow between 20-58% in the next three years, and the income will grow 29-36%. These predictions are reasonable as the company has been growing earnings at 100%. Further, the fundamentals of the business (GMV, buyers, and buyer spending) are all growing between 30% and 55%. Thus, a growth rate of ~25% seems reasonable. I will use 22% in my models to be conservative. In this method, we look at the growth of the income. Today, the TTM EPS is 2.58. If this grows at a rate of 22%, the EPS will be $18.85 in ten years. With a 44 PE at some point in the future, the shares could be $829.22 in ten years. Discounting this price today at a MARR of 15%, we get a 'fair value' of $204.97 and a buy signal at $102.49. In this method, we look at the free cash flow of the company. We want to be paid back our initial investment in eight years or less. We do this by adding up the annual FCF/share. Today, that TTM FCF is $120.20, which gives us $3.65 FCF/share. We also assume the FCF grows at a rate of 22%/year. This table tells us that $79.15 would be a great buy price from an FCF point of view. At the current price of ~$23, we would be paid back in four years. In this valuation method, we imagine that the company is a rental property that we own, which throws off owner earnings, the category preferred by Warren Buffett. This analysis is saying that the company will throw off $4.38 of earnings/share each year, which we can buy for $23. With the shares sitting around $23.15, this stock has a large implied upside. If my calculations are correct, this is a growing, cash-generating business, that is wildly on sale. The market is generally rational, so why is this on sale? The first reason is that the market doesn't trust the company yet. It IPO'd a few years ago and quickly had a stumble with its earnings growth due to the supply chain issue. There is also the China factor; this company is somewhat rooted in China. The majority of their suppliers are in China, but they are seeking to diversify away from this. The Noble House acquisition is part of this supplier diversity strategy. Further, they used to be listed in China, but because a large majority of their business is in the US they are now domiciled in the US and listed on the NASDAQ. My hunch is that it will take time for the market to warm to GigaCloud. If GigaCloud is able to consistently execute its business model and achieve income growth, quarter after quarter, then Mr. Market will not be able to resist a large re-rating. My guess is that this re-rating could take between 1-2.5 years. There are a few risks to this company. The first risk is that the housing market slows down further. If we have a large recession and/or if the interest rates rise, the housing market could cool further. This would affect furniture sales and other big and bulky items. The other main risk is that a major spike in shipping rates would eat into their margins. Shipping rates have risen a bit in the last year. If we have another supply chain event, that would eat into GigaCloud's margins All this is to say that GigaCloud are a wonderful business, and they are on sale.