The artificial intelligence (AI) megatrend continues to dominate the investing world. As the technology is adopted for increasingly widespread applications across various industries, the AI market is projected to approach $2 trillion in size by the end of this decade - and investors are pouring billions into AI-related stocks.

Semiconductor designer Nvidia (NVDA), along with familiar tech titans like Microsoft (MSFT) and Amazon (AMZN), have been among the biggest beneficiaries of this technological disruption. However, the latest quarter's earnings reports highlighted some winners from the AI server industry, too - including one stock that has returned more than 1,100% over the past year, raising concerns about its valuation.

About Super Micro Computer Stock

Founded more than three decades ago in 1993, Super Micro Computer (SMCI) designs and manufactures high-performance, high-efficiency server technology through its server management software and storage systems. It targets markets like enterprise data centers, cloud computing, AI, 5G, and edge computing. 

SMCI stock has rallied a mind-boggling 304.8% on a YTD basis, and is up 1,148% over the past 52 weeks. Its market cap currently stands at $60.41 billion, and Super Micro recently joined the S&P 500 Index ($SPX).

With the continued rise of generative AI technologies, demand for the company's optimized rack-scale solutions has been surging. Specifically, Super Micro's competence in the use of liquid-cooled server racks gives it a competitive advantage. 

Liquid cooling, commonly used in supercomputing, offers more efficient cooling for multi-rack servers compared to air cooling. With the increasing importance of AI hardware, SMCI offers fast, innovative, and environmentally friendly liquid-cooled racks in a variety of designs.

Looking ahead, Bank of America expects the explosive growth in the AI server market to continue, with a recent report from the firm calling for a 50% growth pace over the next three years. 

However, although the tremendous rally in Super Micro has created enormous wealth for investors, it has raised quite a few concerns that the stock may be overvalued.

Is SMCI Stock Overvalued?

One of those skeptics is Goldman Sachs analyst Michael Ng, who on March 4 started coverage of the stock with a “neutral” rating and a $941 price target - a discount of 18.7% to current levels. 

While Ng said Super Micro's "unique speed to market capabilities have positioned them attractively to serve AI-related demand,” he believes that “other larger vendors… have since come to market with solutions optimized for AI training, so it is likely that [Super Micro’s] spike in market share in recent quarters may normalize lower as competition increases.”

The Goldman analyst believes SMCI stock would be fairly valued around 32 times forward earnings, which is “in line with other AI enablers." SMCI is currently priced at 49.6x adjusted forward EPS, which is a significant premium to rival AI server stocks like Dell (DELL) and Hewlett Packard Enterprise (HPE).

Super Micro Beats on Earnings, Revenue

That said, SMCI's valuation is supported by its strong fundamentals, as well as its robust growth forecast. The company has been consistently profitable in recent years, with revenues tripling over the past three years. 

For the latest quarter, Super Micro reported net sales of $3.6 billion, double the previous year's $1.8 billion. Fiscal Q2 EPS grew by 71.5% from the year-ago period to $5.59, comfortably outpacing the consensus estimate of $5.16. Remarkably, over the past 16 quarters, the company's EPS has beaten Street estimates on 15 occasions.

The company exited the quarter with a cash balance of $726 million, almost double its total bank debt of $376 million.

And for the full fiscal year ending June 30, Super Micro raised its revenue guidance from a range of $10 billion to $11 billion to a range between $14.3 billion and $14.7 billion, reflecting solid demand for its products and services.

What's the Growth Forecast for SMCI Stock?

To go along with its industry-leading valuations, Super Micro's growth estimates are also well ahead of the industry mean. Analysts are projecting forward revenue growth of 57%, which is well above the growth forecasts for DELL and HPE.

EPS growth for SMCI is expected at 269% for the current quarter, and 81% for FY 2024 - again, well beyond the growth anticipated for other AI server stocks.

That said, there are some risks worth noting. Super Micro's non-GAAP gross margin dipped from 18.8% in Q2FY23 to 15.5% in Q2FY24, with the company citing a focus on “market share gains” as the reason. 

Additionally, its high supplier concentration got even higher in fiscal year 2023, as two key suppliers now account for a combined 44.2% of total purchases, up from 29.5% in fiscal year 2022. 

Likewise, while the company doesn't have any single customer exceeding 10% of sales in the past three years, two customers make up a significant portion of accounts receivable, totaling 42.2% as of June 30, 2023.

What Do Analysts Expect for SMCI Stock?

Overall, most analysts remain cautiously optimistic about SMCI stock, which has an average rating of “Moderate Buy.” Although the mean target price of $742.22 has long since been surpassed, the high target price of $1,300 denotes an upside potential of about 12% from current levels. 

Out of 10 analysts covering the stock, 6 have a “Strong Buy” rating, 3 have a “Hold” rating, and 1 has a “Strong Sell” rating.