Down 45%, Should You Buy the Dip in Super Micro Computer Stock?

As the artificial intelligence (AI) revolution reshapes the tech landscape, demand for AI servers is skyrocketing. Super Micro Computer, Inc. (SMCI) is riding this wave, thriving as a key player in supplying powerful AI hardware. Its cutting-edge servers are pivotal in powering AI advancements, positioning SMCI perfectly to capitalize on this transformative shift in technology.

After joining the S&P 500 Index ($SPX) in March, Super Micro has further cemented its tech prowess by being added to the benchmark Nasdaq-100 Index ($IUXX) in July.

Despite this success, SMCI stock has pulled back sharply amid the broader rotation out of tech stocks, and is now down 45% from its YTD highs set in March. However, analysts are bullish on the stock’s prospects due to Super Micro Computer’s unique position in the AI server market, with the Wall Street consensus projecting significant upside potential.

With quarterly earnings coming up soon, should investors seize the opportunity and buy the dip in SMCI stock? Let’s dive in and explore.

About Super Micro Computer Stock

Founded in 1993 and headquartered in San Jose, California, Super Micro Computer, Inc. (SMCI) boasts a market cap of $37.3 billion. The company develops high-performance server and storage solutions worldwide, with a product range that includes modular blade servers, storage systems, and server management software. Serving enterprise data centers, AI, and cloud computing markets, Super Micro Computer combines innovation with curated customer support to lead in tech infrastructure solutions.

After starting this year as a component of the small-cap Russell 2000 Index (RUT), SMCI’s ascent has been nothing short of meteoric. On March 18, the server manufacturer stock replaced home appliance specialist Whirlpool(WHR) in the S&P 500 Index, and on July 22, it was added to the Nasdaq-100, elbowing out the retail pharmacy giant Walgreens Boots Alliance (WBA).

News of SMCI’s entry into the S&P 500 sparked a rally in early March, with the shares ultimately peaking at record highs of $1,229. Though the stock has pulled back sharply from those highs, SMCI is still up by 134.4% in 2024, and 99% over the last 52 weeks - far outpacing the S&P 500’s returns over both time frames.

From a valuation standpoint, SMCI trades at 23.49x forward earnings, significantly higher than its closest peers and its own five-year average of 15.32. However, the stock’s price/earnings-to-growth (PEG) ratio of 0.58 is notably low, suggesting that investors are paying a premium in exchange for SMCI’s expected above-average growth.

Super Micro Exceeds Q3 Earnings Estimates

On April 30, Super Micro Computer reported its fiscal Q3 results. While net sales tripled to $3.85 billion, a stunning leap from the year-ago quarter’s $1.28 billion, adjusted EPS soared 308% annually to $6.65, smashing the consensus estimate by 21%. The company closed the quarter with a cash and equivalents balance of $2.1 billion, far exceeding its short-term and long-term debt of $81.6 million and $85.6 million, respectively.

Demand for AI rack scale PnP solutions and Super Micro's knack for innovative DLC designs boosted its market leadership in AI infrastructure. As these solutions ramp up, the company projects continued market share growth.

Super Micro is anticipated to report its next quarterly earnings on Tuesday, Aug. 6, after the market closes. For the fiscal year ending in June 2024, management raised its revenue guidance, anticipating revenues between $14.7 billion and $15.1 billion, while non-GAAP net income per share is projected to range between $23.29 and $24.09.

Analysts tracking Super Micro project the company’s EPS in fiscal 2024 to hit  $21.11, up 94.4%, and jump another 43.6% to $30.32 in fiscal 2025.

What Do Analysts Expect for Super Micro Stock?

In April, Loop Capital's Ananda Baruah reaffirmed a "Buy" rating on Super Micro stock, and hiking the price target to $1,500 - implying an impressive 125.1% expected upside. The analyst highlighted Super Micro’s robust business and its advantageous positioning as the AI market expands.

Loop Capital, having co-managed a $1.7 billion convertible notes offering for Super Micro in February, likely has a deeper understanding of the company's core strengths compared to other Wall Street firms. This insider insight adds weight to their bullish outlook.

Analysts are cautiously optimistic about Super Micro stock’s prospects, with a consensus “Moderate Buy” rating overall. Out of the 13 analysts covering the stock, seven advise a “Strong Buy,” five analysts are playing it safe with a “Hold,” and the remaining analyst recommends a “Strong Sell.”

The mean price target for SMCI is $1,031.36, indicating an upside potential of 54.7% from current levels.