Super Micro Computer (NASDAQ:SMCI) is an American information technology company headquartered in San Jose, California, that provides customers with servers, storage systems, and rack-scale solutions. Recently, the company has received a lot of attention for its stock value, which surged 448% year-over-year (YOY). Despite some postulating, that this has led Super Micro Computer stock to become overvalued, it might still sustain more growth in the future.
That’s because it has excellent catalysts, including its developments in the AI industry and partnerships with big companies like Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). Due to this trajectory, its forecasted fair value per share is $1,111.69, a 23% upside from its current price of $903.34. But is this valuation realistic or will it become another future victim of a potential AI bubble burst?
An Emerging Catalyst
Super Micro Computer’s expansion into the AI industry is the primary catalyst for the company’s growth. As a result, the company benefits from the surging demand for AI integration across several sectors. For example, Super Micro Computer has launched a new product called Edge AI, designed to embed AI algorithms directly into local devices.
The advantage of this product is its capability to provide immediate insights into the data and improve privacy. As such, this product focuses on the shift toward decentralized computing AI models, which means computer systems can operate independently of a central server. Furthermore, Edge AI represents an advancement in processing data, allowing faster and more private data transfers. This innovation could be a crucial catalyst for the company, as it could create a new industry trend shift toward operation across diverse devices without a central device.
Moreover, complex AI models require higher computational power and energy intensity. To address this, Super Micro Computer develops liquid cooling technologies, providing solutions to the problem of high energy consumption. Thanks to this product line, Super Micro Computer stock could benefit from the growing demands in the AI sector and sell more of its liquid cooling products.
Another catalyst for Super Micro Computer is its strong partnerships with other firms, including Nvidia, Intel, and Advanced Micro Devices (NASDAQ:AMD). Super Micro Computer maintains its deep collaboration with Nvidia by integrating Nvidia’s advanced graphics processing units into its server solutions.
More recently, Super Micro Computer announced it will integrate Nvidia Blackwell into its new Total IT Solution. This could provide technological advancements in Super Micro Computer’s products. This collaboration can escalate Super Micro Computer’s revenue stream and performance.
Valuation Basis
Super Micro Computer’s financials indicate a solid revenue increase YOY. The revenue for Q3 2024 is $3.85 billion, a 200% revenue growth YOY. I forecast its fiscal year 2024 full-year revenue to reach up to $13.18 billion, an 85% growth YOY. This significant revenue growth is backed by the solid, growing demand for the company’s products.
I also believe that Super Micro Computer’s growth could remain robust for future periods as the AI revolution is strengthening across industries. The company presents a negative cash flow for Q3 2024. This is mainly due to the increase in inventory of 67% quarter-over-quarter.
For numerical analysis, I am calculating the cost of equity using a beta of 1.34 and a risk-free rate of 4.44%. The calculated WACC is 10.5% based on the cost of equity, which is 10.57%, and the after-tax cost of debt, which is 3.12%. The equity value is divided by the total number of outstanding shares, which is 58.56 million. The calculated equity value per share is $1,111.69, representing a potential 23% upside from the current price of $903.94.
SMCI’s Potential Risks
The first risk for Super Micro Computer is security issues or cybersecurity risks. Due to the critical nature of its technologies Super Micro Computer could face security issues with its products. To avoid this, the company must ensure its products can prevent threats and enhance safety to protect the customer’s data.
Another possible risk for Super Micro Computer stock is rapid technological industry change. The AI or technology market is highly competitive and constantly changing, meaning SMCI could lose its competitive edge. Moreover, the company depends heavily on manufacturing and requires a high inventory to meet its production demand. If Super Micro Computer manages its inventory ineffectively, this could negatively impact the company’s operation in the long run. Therefore, Super Micro Computer needs to manage its production effectively in response to market changes.
Conclusion
Super Micro Computer’s substantial expansion into the AI industry and its partnerships with other companies indicate a potential catalyst for its growth. However, it faces some risks, including cybersecurity risks, intense competition in the AI industry, and inadequate inventory. If the company can manage its business operations and sustain its long-term growth, Super Micro Computer could reach a fair value of $1,111.69, a 23% upside. Thus, I recommend Super Micro Computer as a buy.
On the date of publication, Michael Que 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.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.