A relatively unknown artificial intelligence enabled server seller not long ago, Super Micro Computer (NASDAQ:SMCI) is now a darling of the financial market. Some folks like to jump on the bandwagon and buy “superstar stocks.” That’s fine until the music stops and Super Micro Computer stock investors are left holding the proverbial bag.
Don’t get the wrong idea. Super Micro Computer’s market capitalization could keep growing in this year’s second half. However, it’s a question of risk-versus-reward at this point.
If you invest in Super Micro Computer now, you have to ask yourself: Am I feeling lucky? And when you find yourself asking that question, you’re probably in a dangerous trade.
When ‘Buy the Dip’ Goes Too Far
It’s true that Super Micro Computer stock recently pulled back from its peak price of $1,229. Knowing this, some folks who have been conditioned to buy each and every dip might be tempted to invest in Super Micro Computer right now.
This, I believe, would be taking “buy the dip” too far. Investors should put the Super Micro Computer share dip into perspective.
Super Micro Computer stock was the S&P 500’s best-performing stock of 2024’s first half. It went up 188% in a six-month period. Even if the stock falls 20% or 30%, that’s a comparatively tiny dip.
Reportedly, some of Super Micro Computer’s insiders sold Super Micro Computer shares during the past 12 months. Among the sellers was company founder Charles Liang.
These insiders’ average share-sale price was approximately $315. So, do you still think Super Micro Computer stock is a bargain at around $900?
Super Micro Computer: Big Sales, Bigger Share-Price Rally
The optimists might try to justify the Super Micro Computer share-price rally by pointing to Super Micro Computer’s sales for fiscal 2024’s third quarter. Specifically, the company reported sales of $3.85 billion, up 200% year over year.
That figure actually fell short of Wall Street’s consensus estimate of $3.99 billion in sales. More importantly, Super Micro Computer stock has gotten ahead of itself, having increased 188% in six months versus Super Micro Computer’s sales growing 200% over a 12-month period.
Now, Super Micro Computer has a trailing 12-month price-to-sales (P/S) ratio of 4.12x. That’s notably higher than the sector median P/S ratio of 3.05x.
It far exceeds Super Micro Computer’s five-year average P/S ratio of 1.12x. This is another sign that Super Micro Computer is a very richly valued market darling.
Super Micro Computer Stock: Don’t Risk Dollars for Pennies
There’s an old saying: Don’t try to pick up pennies in front of a steamroller. Even after a relatively minor share-price dip, Super Micro Computer is more than fully valued. It’s too dangerous to buy shares now as the rollover risk is substantial.
If Super Micro Computer stock pulls back an additional 30% or 40% or 50%, then we can certainly revisit this conversation.
For the time being, however, it’s wise to take any profits you might have, and I currently don’t recommend investing in Super Micro Computer.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
