Even if you’re bullish on the generative AI growth trend, I can understand if you’re still hesitant to buy Super Micro Computer (NASDAQ:SMCI). Super Micro Computer stock has been one of the top AI winners, but many also believe that SMCI is more vulnerable than other names in this category.
While valuation concerns can be quickly assuaged, bearish arguments about Super Micro Computer are weak upon closer examination. Despite being in a commodified business, Super Micro has built a strong moat that will enable it to keep its competitive edge.
Super Micro Computer Stock: Top Dog Among Server Builders
When you think top-performing AI stock, Nvidia (NASDAQ:NVDA) may first come to mind. However, SMCI’s performance thus far in 2024 has topped that of NVDA. While Nvidia is up an impressive 82.5% year-to-date, SMCI is up by nearly 265% during this same time frame.
Make no mistake. Super Micro Computer stock isn’t up because of speculative frenzy. It’s not because SMCI has become the meme stock of the year.
Rather, it’s because, as MarketWatch put it a few months back, the company has been “mopping up the floor” with the competition in the AI-dedicated server market.
Much like Nvidia was quick to the punch capitalizing on the sudden high demand for AI-compatible chips, Super Micro quickly capitalized on the AI growth trend. As a result, it beat out competing server builders to become the leading choice for this end-user market.
In turn, this produced super duper fiscal results for Super Micro. For instance, last quarter, net sales increased by 72.6% on a sequential basis, and by 103.3% on a year-over-year basis.
Non-GAAP earnings increased by nearly 63% on a sequential basis, and by 71.5% on a year-over-year basis.
3 Reasons SMCI Has Staying Power
Critics of Super Micro Computer stock may concede that the company has indeed “mopped the floor” with rival server systems builders. However, while they may agree Super Micro is crushing it now, they’ll counter that the impact of competition is just starting to surface.
Again, in their view, building AI servers is a commodified business compared to designing innovative AI chips or software. Therefore, as competing server companies catch up, they’ll be able to grab market share from Super Micro Computer.
Yet while this bear case for SMCI might sound solid in an elevator pitch, you don’t have to look far to see that this head hen in the AI server pecking order has much on its side to maintain its current market dominance.
First, Super Micro continues to have early access to cutting edge chips from Nvidia and other top designers. This gives the company a speed advantage.
Second, these strong supplier relationships also provide a customization advantage. Third, Super Micro has focused heavily on bringing liquid cooling server products to market.
This provides an additional edge, given that the high power consumption of AI servers necessitates the need for alternatives to air-based server cooling technology.
The Verdict: SMCI Has Staying Power
Well-positioned to maintain an edge over the competition, Super Micro Computer is in the catbird’s seat. As the AI server market continues to grow at a rapid clip, the company is likely to continue to meet, if not beat, expectations.
Consensus calls for revenue and earnings to hit $20.6 billion and $30.59 per share, respectively, next fiscal year. However, the top end of forecasts call for revenues of $25.2 billion, and earnings of $37.84 per share.
If the company pulls this off, in essence maintaining high double-digit levels of growth, a continued run-up in price is likely in the cards.
Don’t count on Super Micro Computer stock to surge by another 265% anytime soon, but given the strong prospects for further steady gains, buy if you’ve yet to buy, maintain a position if you already own it.
SMCI stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in SMCI and NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
