Super Micro Computer » SMCI // Tech Sector // Strike Price = $xx {subscribe}
The name of the company may sound like it’s from a by-gone era but is in fact rather relevant today as data centers stock their racks with servers capable of handling the AI onslaught. Basically they assemble software and components from a bunch of semiconductor designers and manufacturers to make computing beasts (servers) that store, process and serve all the info we call up on our devices. For the sake of data center operators and the planet they try to do this in as scalable and energy-efficient way as possible.
You can read the Company Profile below if you need to know more or go to their website if you want to check out their products and solutions: https://www.supermicro.com
The stock is up over 225% since the start of 2023. The high in August had it well above that pace. In the preceding 15 years it had basically gone nowhere; $9 in 2007 to finally breaking $50 in 2022. And then ChatGPT came along. The chart makes it look like a ridiculous time to entertain buying this stock — can you say hockey stick — but the underlying numbers suggest the idea may not be crazy depending on how much margin of safety you dig.
// COMPANY PROFILE
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Super Micro Computer, Inc., together with its subsidiaries, develops and manufactures high performance server and storage solutions based on modular and open architecture in the United States, Europe, Asia, and internationally. Its solutions range from complete server, storage systems, modular blade servers, blades, workstations, full racks, networking devices, server sub-systems, server management software, and security software. The company provides application-optimized server solutions, rackmount and blade servers, storage, and subsystems and accessories; and server software management solutions, such as Server Management Suite, including Supermicro Server Manager, Supermicro Power Management software, Supermicro Update Manager, SuperCloud Composer, and SuperDoctor 5. In addition, it offers server subsystems and accessories comprising server boards, chassis, power supplies, and other accessories. Further, the company provides server and storage system integration, configuration, and software upgrade and update services; and technical documentation services, as well as identifies service requirements, creates and executes project plans, and conducts verification testing and technical documentation, and training services. Additionally, it offers help desk and on-site product support services for its server and storage systems; and customer support services, including ongoing maintenance and technical support for its products. The company provides its products to enterprise data centers, cloud computing, artificial intelligence, and 5G and edge computing markets. It sells its products through direct and indirect sales force, distributors, value-added resellers, system integrators, and original equipment manufacturers. The company was incorporated in 1993 and is headquartered in San Jose, California.
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// INVESTING THESIS
The golden age of AI has begun and SMCI is a picks-n-shovels play on this game(life)-changing technological advance that our civilization is entering.
Despite the meteoric rise in the stock price the forward PE is only 16. To put that number in perspective, the overall S&P 500 PE Ratio is 25.50. The forward Price/Sales Ratio is 1.43. The Tech Sector median PS is 2.63. SMCI has a 5 year average of 0.53. From the top and bottom line perspective they had room to grow and despite the rapid stock price appreciation they still appear to have room to grow. Nvidia will likely grow at a faster pace but their PE is 41 and PS is 20.
SMCI also have a very respectable 28% ROIC and 4.4% FCF yield. Microsoft is 25% and 2.5%. SMCI could use a little more cash to cover operating expenses just in case, but there long term debts are minimal.
What they don’t have is stellar margins. Operating margin is 11%. Microsoft is 41% but they have more software related sales and a serious moat. The good news is that SMCIs 2019 operating margin was only 3% so things are progressing, moat-wise. I would also contend that the semiconductor industry is de-commoditizing due to the increasing complexity of the industry. This could alleviate margin pressure as it reduces the race-to-the-lowest-price paradigm.
Nearly half of SMCIs revenues are coming from AI and the TAM for servers that can handle the robots is expanding. That said, the revenues were $3.x Billion for 4 years in a row before jumping to $5.2B as of Jun 2022 and $7.1B as of Jun 2023 so there could be a revenue growth cooling factor there for a bit as everyone has been trying to buy AI-related hardware of late. This could cause some guidance blemishes over the next few quarters that could cause investors to take profits. Current revenue expectations for Jun 2024 are for a lofty $9.9B (+39%) and a more sustainable $11.5B (+16%) for Jun 2025. EPS growth estimates are about the same.
It took many years, but SMCI appear to have become an excellent under the radar company whose time to shine has arrived. Don’t expect them to become a household name unless you live and breath in the IT department. They still have room to run but after such a run up investors could be jittery and take profits so awaiting a price with more of a margin of safety to maximize the CAGR on your investment would be my recommendation. What is that price, you ask?
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