Super Micro Computer (SMIC), popularly known as Supermicro, has transitioned from one of the most beloved companies this year to a fallen angel. After peaking at $1,227 in May, the stock has crashed by over 50% to $607 as concerns about its growth and valuation continued.

Supermicro’s cooling growth

Super Micro Computer has been one of the breakout stars in Wall Street this year as its growth accelerated because of the AI hype. At its peak, its May, its market valuation was over $67 billion, a figure that has now dropped to $35 billion.

Supermicro’s growth has been driven by the ongoing demand for artificial intelligence solutions. Data center operators like Amazon, Microsoft, Google, and IBM are spending billions each quarter to build and scale their locations. Its recent results showed that Micrsoft likely spent over $13.4 billion in AI investments in Q2.

Supermicro is a major provider in the data center industry, where it provides servers and storage solutions, building blocks, networking, and other workstation solutions.

The most recent retreat happened after the company published strong but weaker-than-expected financial results. These numbers revealed that its revenue rose by 143% to over $5.3 billion, a figure that was higher than the $5.1 billion that it made in FY 2021. 

Super Micro Computer’s annual revenues jumped to over $14.9 billion, a 110% increase from what it made in the last financial year. This performance makes it one of the fastest-growing companies in the industry. 

Most importantly, the management believes that it has more room to grow. Its forward guidance calls is that its annual revenue will be between $26 billion and $30 billion. I believe that its revenue will be higher than that since the company has a history of being highly conservative. 

A core element in Super Micro Computer’s growth is that it is happening profitably. Annual net income rose from just $84 million in 2019 to over $1.2 billion in the last financial year. While its gross margin is just $14%, the company was able to generate a net margin of 8%. 

Its margin growth will likely continue as the company completes its investments such as its manufacturing facilities in San Jose, Taiwan, and Malaysia.

SMCI is an undervalued company

In an era where many companies seem highly overvalued – read my SentinelOne report – Supermicro seems like one of the most undervalued ones. 

Its market cap stands at around $35 billion while its annual revenue has jumped from $3.3 billion in 2019 to over $14.9 billion. The company anticipates over $30 billion in annual revenue in the current financial year followed by $33 billion in the following one. 

This means that it has a forward price/sales ratio of just 1.2, a figure that is lower than other hardware companies. For example, Nvidia trades at a forward P/S ratio of 25.8 while AMD has 9.8. 

Other metrics show that the company is dirt cheap. It has a forward P/E ratio of 20.49, lower than the industry median of 28.8. The S&P 500 index, which had an earnings growth of 10.8% has a forward P/E ratio of 21, according to FactSet. 

As such, for a company that is more than doubling its sales and earnings, a forward P/E ratio of 20 seems like a bargain. 

Indeed, most analysts expect that Super Micro Computer’s stock will continue doing well. The average stock estimate is $874, 42% above the current level. 

Nvidia earnings ahead

Still, SMCI stock has a major risk. As we have seen before, companies tend to ramp up their products when there is robust demand. This happened in the semiconductor industry as shortages led to major demand after the Covid-19 pandemic. 

The risk is that this growth could lead to higher inventories, which will reduce its margins in the future. Indeed, the most recent numbers showed that its inventory rose to over $4.4 billion from $4.12 billion in the March quarter.

The next key catalyst for the SMCI stock price will be the August 28 Nvidia earnings, which will show whether the data center demand is still rising.

Super Micro Computer stock price analysis

(Click on image to enlarge)

Technically, things seem to be going badly for the SMCI stock price. It has dropped from a high of $1,227 in May to the current $600. It remains below the key support at $671.52, its lowest point in April. 

The stock is also about to form a death cross chart pattern, where the 50-day and 200-day Exponential Moving Averages (EMA) cross each other.

Therefore, for now, there is a risk that the Supermicro will remain under pressure, especially if Nvidia publishes weak results. In the long term, however, the stock will likely have an epic comeback as investors go bargain hunting.

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