Finance
Is Super Micro Computer Stock a Good Buy Now?
The excitement around artificial intelligence (AI) has played a big role in pushing the markets higher so far this year. Although major tech stocks such as Nvidia And Microsoft As we’ve witnessed excessive buying activity, many investors have looked at less obvious choices in hopes of identifying the next big AI opportunity.
One such company that has seen its share of hype is Super microcomputer (NASDAQ: SMCI). Shares of the AI darling are up 234% in the past year, and 218% in 2024 alone.
Although Supermicro is closely tied to Nvidia, the underlying business is actually very different – and in my opinion, I think it is much less lucrative.
Let’s take a look at Supermicro’s investment prospects and explore whether the stock deserves a place in your portfolio.
Supermicro’s activities are growing enormously, but…
Perhaps the hottest jerk in the AI realm semiconductors. Demand for graphics processing units is skyrocketing (GPUs) as generative AI applications continue to evolve.
For now, Nvidia, AMD, Intel, and several other chip designers have emerged as the biggest names in the GPU market. Although Supermicro works with many chip companies, it is not a semiconductor company itself.
On the contrary, Supermicro specializes in IT infrastructure. Essentially, the company designs architectural solutions such as storage clusters for high-performance GPUs.
The revenue trends below illustrate how increased demand and purchasing activity around chips has served as a benchmark for Supermicro’s services in recent years.
While the new revenue growth is encouraging, there are some negatives that investors should be aware of when it comes to Supermicro.
…there is more than meets the eye
While the rising demand can be seen as a good thing for Supermicro, keep in mind that building an IT infrastructure is an expensive endeavor.
Check out the dynamics in the graphs below. In more recent quarters, Supermicro’s capital expenditures (capex) have soared. The idea I’m trying to convey here is that while the company’s revenues are increasing, costs are also increasing significantly.
This dynamic has a direct impact on Supermicro’s margin profile. As seen below, Supermicro’s gross margin is currently stabilizing.
Granted, the financial data analyzed above isn’t necessarily a reason to run for the hills. However, there are some other potential issues we can investigate if they are related to Supermicro.
Keep in mind that the semiconductor sector is a cyclical industry. Right now, chip companies are experiencing a bit of a renaissance, fueled by AI euphoria. But like any other type of business, supply and demand trends will eventually normalize.
That could spell trouble for Supermicro in the long run. It’s quite difficult to predict demand for any product, let alone cutting-edge chips used for breakthrough applications in AI. These themes make me worry that Supermicro’s business will witness a slowdown. This could further impact the company’s profitability profile, which would be an unwanted surprise given the already low-margin nature of the company.
Is this a good time to buy Supermicro stock?
While many investors have undoubtedly made a lot of money owning Supermicro stock, I doubt the returns were for the right reasons. I suspect many investors view Supermicro as analogous to Nvidia and have invested in the stock accordingly. As Nvidia and other chip stocks rose, shares of Supermicro followed suit.
The chart above compares Supermicro to a peer company on a price-to-earnings (P/E) basis. The obvious conclusion from the above valuation trends is that Supermicro is valued at a significant premium to its peers.
However, a more subtle argument is that companies such as Dell Technologies And International business machines in particular, are not only much larger than Supermicro, but also much more diversified when it comes to products and services. And yet Supermicro’s price-to-earnings ratio is more than double IBM’s and significantly higher than Dell’s.
Given the level of competition and cyclicality of the chip market more broadly, combined with the high capex and low margins of Supermicro’s business, I can’t help but think the stock is overvalued.
I think investors with a long-term horizon have better opportunities in chips and the AI arena in general. While it may seem tempting to pick up Supermicro shares, I see the company more as a trading company and less as an investment.
Should You Invest $1,000 in Super Micro Computer Now?
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Adam Spatacco has positions at Microsoft and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends Intel and International Business Machines and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short August 2024 $35 calls to Intel, and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Is Super Micro Computer Stock a Good Buy Now? was originally published by The Motley Fool
