Up More Than 170%, Is Super Micro Computer Still a Buy?

Super Micro Computer (SMCI 2.31%) is a company that’s been around for quite some time, growing slowly but surely — until about a couple of years ago when revenue exploded higher. The reason for this sudden boost to growth? The artificial intelligence (AI) boom. Super Micro makes the servers, workstations, and full rack scale systems that are key elements for AI programs.

All of this has equaled share performance too, with Super Micro’s stock soaring 170% this year alone — and the stock has climbed more than 4,000% over the past five years, scoring a massive win for long-term investors. But after all of these gains you may be wondering if it’s too late to get in on this AI story. Or is Super Micro still a buy? Let’s find out.

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Super Micro’s $3 billion quarter

Super Micro has been around for 30 years, but, as mentioned, it’s only in the past few that the company’s earnings have truly taken off. The equipment maker reported its first $3 billion quarter recently — surpassing its revenue for the entire year as recently as 2021. The company’s profit also has taken off, climbing more than 700% over the past five years to reach more than $600 million in the last fiscal year.

Now, let’s talk about why Super Micro has been so popular with AI customers, leading to its explosive increase in revenue. The main reason for this is the company’s ability to deliver precise, customized solutions to customers — and fast.

Here’s how Super Micro does this: The company uses a building blocks system, meaning its product lines involve common parts. This allows Super Micro to quickly update products and adapt them to each customer’s needs. Super Micro also works hand-in-hand with the world’s top chip designers such as Nvidia and Intel so that when they announce new chips, Super Micro can quickly include these latest innovations in its own products.

And this means new releases such Nvidia’s upcoming Blackwell architecture and chip also should boost orders and revenue at Super Micro. So, when a big chip designer launches something new, Super Micro is likely to benefit.

Growing faster than the industry average

All of this has helped Super Micro to grow at a rate that’s five times faster than the industry average over the past 12 months. To keep that momentum going, the company has ramped up production close to home in Silicon Valley as well as internationally — for example, Super Micro’s new Malaysia facility will focus on lower production costs and higher volume.

In Super Micro’s latest earnings report, the company said it’s seeing ongoing record demand for its AI rack scale direct liquid cooling (DLC) systems including the latest chips from Nvidia, Intel, and Advanced Micro Devices. And speaking of DLC, Super Micro’s technology may be heading for major gains. Need for cooling systems is growing due to the heat-intensive nature of AI tasks across big data centers.

Super Micro chief executive officer Charles Liang said at the recent Computex event that 30% of the company’s rack shipments next year will include liquid cooling — up from 15% this year, according to an article in The Register. And Super Micro is prepared for this growth, saying its new DLC building blocks and rack scale total solution technology is ready for high volume production.

Is Super Micro a buy?

Now let’s consider the future, and that brings us back to our question: Is Super Micro still a buy after its enormous gains? Today, Super Micro trades for 32x forward earnings estimates, which is very reasonable for a profitable growth stock that’s a leader in its field.

And to make the picture even brighter, it’s important to remember the AI story is just getting started, so demand could continue for years to come. After all, analysts predict the AI market will reach $1 trillion by the end of this decade. Super Micro’s Liang also has said he’s optimistic about growth continuing for a number of years.

All of this means that, even though Super Micro has skyrocketed, the gains may be far from over. Ongoing demand from AI customers should continue to boost earnings over time — and this is great news for the stock and shareholders who stick around for the long term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.