Everyone might be talking about the stock performance of Nvidia (NASDAQ:NVDA) last year but Super Micro Computer (NASDAQ:SMCI) stock blew away the chipmaker. SMCI stock is up 1,200% compared to the measly tripling in value by Nvidia.
The manufacturer of servers, networks, storage solutions, workstations and more optimized for artificial intelligence (AI) has gotten an even bigger boost from the technology than the semiconductor stock. Fiscal second-quarter sales doubled from last year to $3.7 billion while profits rose 62% to $296 million. Earnings growth has been north of 50% a year for the past few years.
Yet with ridiculous stock price gains usually reserved for pump-and-dump penny stocks and not a company valued at $65 billion, it’s right for investors to ask if Super Micro Computer is still a buy.
What customers want when they need it
The forces that made everyone agog over Nvidia are the same ones driving SMCI stock higher. Data centers, hyperscalers and others with a need for the sort of high-end, high-efficiency servers the company makes have been buying them in bulk. Management expects growth to accelerate from here. As companies invest in AI and look for full rack scale solutions, Super Micro’s products fit their unique need.
The servers and hardware are also customizable. Using what Super Micro calls its building block architecture, customers get exactly what they need for their unique situation. Super Micro says it works closely with the leading chipmakers, graphics processing units (GPU) manufacturers, memory and other hardware and software suppliers to coordinate its product designs. That way it can coincide with their product release schedules.
The extreme computing power demanded of the equipment by AI means typical off-the-shelf equipment is not suitable for the task.
Trying to stay ahead of demand
Demand is already crushing. Super Micro’s facilities in the U.S., Netherlands and Taiwan are already swamped. They suffer from utilization rates of just 65%, though the number is increasing. Super Micro Computer isn’t standing still. It is already planning future needs by building out capacity. It has two new production facilities and warehouses in the Silicon Valley area that will begin operating in a few months. A new Malaysia plant will go online after that. In particular, this new facility will further increase Super Micro’s total revenue potential by building out equipment at scale but on a reduced cost structure.
The equipment maker will be able to speed up delivery even more. Barring additional supply chain snafus, Super Micro can design, manufacture and deliver complete plug-and-play rack-level solutions to customers in just weeks of when an order is placed. Typically such orders can take months. As companies try to get a leg up on their competition, this speed becomes critical.
Paying up for quality?
SMCI stock is not cheap. Trading at 90 times trailing earnings and 7 times sales, the company carries some lofty valuations. That might be expected as the stock leapfrogs over prior highs on a seemingly daily basis. It jumped 20% in one day when it was announced SMCI was being added to the S&P 500.
The question is whether it’s worth that price. The company’s business is solid and growing rapidly. Much like Nvidia, there is no let up in sight for its server and storage products because of the fire AI lit underneath demand. Yet as much as I like to back a winning horse, I can’t help but urge caution.
Quadrupling in price so far in 2024, up 1,200% in the last 12 months, and 3,100% in the last two years is exciting but not sustainable. At most, take just a small position in SMCI stock if you must. That way you have some skin in the game. However, I’d wait for the inevitable pullback to buy into this incredible growth story more aggressively.
On the date of publication, Rich Duprey did not hold (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.