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It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
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Proprietary Data Insights Financial Pros’ Top Computer Hardware Stock Searches in the Last Month
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Experts Reveal: #1 Computer Hardware Play |
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It’s hard to ignore a genuine stock that soared 737% in less than a year. Every financial pro has their eyes on Super Micro Computer (SMCI), according to our TrackStar data. A lot of investors are kicking themselves for not seeing this AI brick-and-mortar play sooner. All the signs were there. We’re not suggesting you run out and buy shares this instant. However, we’re going to explain why the stock soared so quickly and where a decent entry point might be. Super Micro Computer’s Business Nvidia (NVDA) is the company that makes the AI chips. Super Micro Computer makes the racks for the data centers to run them. You’d think there would be a lot of competition in this area. However, connecting AI processors through high-speed cables requires a lot of expertise, technology, and investment.
Source: SMCI Investor Presentation Super Micro Computers business is divided into two main areas: Server & Storage Systems (92% of revenue) and Subsystems & Accessories (8% of revenues).
Source: SMCI Investor Presentation The main unit makes and sells complete computer systems, while the subsystems and accessories offer parts and components to upgrade systems. Super Micro Computers kind of hid in the background. The pullback in demand during mid-2023 obscured what was otherwise immense growth.
Source: SMCI Investor Presentation But there’s a bit more to this story… Financials
Source: Stock Analysis Super Micro Computer’s growth is excellent. But they’ve also seen margins triple in the last few years. However, there’s a catch. Inventory regularly expands and contracts, giving the company uneven cash flow. In the last twelve months, Super Micro Computer spent more cash than it earned. Yet, in 2023, it brought in almost $664 million in cash. With fairly low Capex, this company is best valued on its earnings, which have doubled since 2022. Debt is low, and with roughly $725 million in cash, the company largely self-funds its growth. One important note: Super Micro Computer only has about 50 million shares outstanding. The low float helped fuel a lot of the meteoric rise in the company’s shares. Valuation
Source: Seeking Alpha Super Micro Computers isn’t cheap by most standards. But there’s one measure that’s telling here. The Non-GAAP price-to-earnings growth ratio (PEG) is 0.76x. Essentially, this earnings metric that includes growth says you’re actually getting a discount on the company based on its earnings growth (1.0x would be fair value). No other competitor is that cheap, with Dell (DELL) close at 1.2x. Growth
Source: Seeking Alpha We already know Super Micro Computer’s sales growth has been amazing. But don’t ignore its phenomenal earnings growth as well. Pure Storage (PSTG) had a 370% YoY earnings growth but is only forecasted to see gains of 32% next year. Super Micro Computer delivered a respectable 21% last year and expects 73% next year. Profitability
Source: Seeking Alpha Interestingly, Super Micro Computer doesn’t have the highest gross margins. However, management believes they can improve those. What Super Micro Computer does have is the best net income margin, hands down at 7.9%, followed by HP (HPQ) at 6.1%.
Our Opinion 8/10 We believe the stock has gotten ahead of itself, but only technically. Value-wise, you could own Super Micro Computer at these levels. However, we wouldn’t be surprised if the stock took a haircut down to $400-$600. The other thing to remember is this is all based on future growth. With Silicon Valley laying off workers left and right, we suspect the current revenue forecasts are too rosy. We also expect a larger correction in AI stocks will dampen optimism. |
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