New Underlying Mini Future: Super Micro Computer
Artificial intelligence, or AI in short, is on every investor's lips. Super Micro Computer (Ticker: SMCI) is one company that has capitalized on this trend, whose share price has set new all-time highs. Is the hype behind the company and the subsequent share price movements justified, or has the investor community completely lost touch with reality?
First and foremost – what do they do?
Super Micro Computer provides solutions that handle a wide range of computationally intensive workloads. The company manufactures servers, storage systems and software precisely for this purpose, and offers its solutions to data centers and large enterprises, among others. SMCI does not itself manufacture the individual components included in the solutions, such as graphics cards manufactured by Nvidia, but instead packages already produced components in server racks which it then offers to its customers. The servers are then used for cloud services, artificial intelligence, and high-performance computer systems.
As previously mentioned, the company has capitalized on the AI trend that currently shapes our society, which is also reflected in the company's reported results. The accelerating demand for solutions like the ones SMCI provides has meant a growing number of orders, and as a result, a significant growth in turnover in recent years. At the same time, the company has managed to expand its margins, which has had a positive impact on the bottom line. SMCI has grown its profits at a Compounded Annual Growth Rate (CAGR) of 52.25 percent from Fiscal Year (FY) 2019 to FY 2023.
A promising technology
Advocates of AI are clear that the technology is still in an early stage, and that the greatest benefits of the technology lie further in the future. Such an assumption would mean that there is still a lot to gain for Super Micro Computer and its peers. The analyst community seems to accept this thesis, and this is reflected in the analyst consensus estimates from Bloomberg for future sales and profits, which are expected to grow strongly. According to the consensus estimates compiled by Bloomberg, revenue could grow at a CAGR of 45.8 percent from 2023 to 2026, and profits by 39.8 percent over the same period. Analysts believe that SMCI can continue to capitalize on the AI trend, and that there is still room to grow for the company.
The high expectations of the investor community are also reflected in the company's valuation. Looking at Price-to-Earnings (P/E), one can observe that the key figure has risen to new levels. As of February 16, 2024, the company is traded at a P/E of 70.3x. The median of the last five years is 14.6x, which means that SMCI is trading at 4.8 times the historical median. A high P/E ratio often indicates high expectations, and given the Bloomberg consensus estimates, there are plenty of positive expectations from the investor community. Advocates of AI and SMCI argue that this valuation is justified by the increased demand for the company's products, which has the potential to drive up sales and profits in the long term. The more negative investors, however, believe that the valuation is far too high and that there is more room for downside in the share price.
Super Micro Computer's share price development also reflects the high expectations of the investor community. The share has developed in an exponential way over the past five years. On February 22, 2019, the share stood at just under USD 20, today five years later the share stands at about USD 900, which means that the share price has been multiplied 45 times over. Such a development corresponds to a Compounded Annual Growth Rate (CAGR) of about 114 percent. The price development has clearly benefited SMCI's shareholders, who have benefited from this sharp rise in the share price. However, with the high expectations priced into the share price, it is questionable whether there is continued upside and whether the trend is sustainable.
Is it only hype?
In summary, the hyped AI trend that all investors are talking about right now has put its stamp on SMCI's share price. The company has clearly benefited from investors' optimism about what the future has to offer, the only question is whether the development is sustainable? As mentioned earlier, there are plenty of optimistic investors who are clear that AI is at an early stage and that there is much more to be gained from the technology. The more pessimistic investors, on the other hand, believe that the valuation is far too high and that the share price is disconnected from the company's underlying fundamentals.
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