Shares of Super Micro Computer(NASDAQ: SMCI) have skyrocketed over the past few years, up nearly 3,000% in three years, which means investors have made a stunning 30 times their money in that short amount of time.
Yet analysts continue to pour compliments on the company and raise their target prices even today, with the highest Wall Street target on the stock at $1,350 -- 26% higher than the current stock price.
What continues to go right for Super Micro? A lot of things, which should enable strong growth over the next few years and keep the stock price up and to the right.
The outlook for AI servers is staggering
Even though it's been 16 months since the debut of ChatGPT, we're still in the very early innings of the AI revolution. Nvidia CEO Jensen Huang has said AI and accelerated computing will drive a doubling of the installed base of data centers in short order, from $1 trillion to $2 trillion. Meanwhile, Advanced Micro Devices CEO Lisa Su believes the AI chip market will reach $400 billion by 2027, with the majority of those chips going into AI servers.
Corroborating Su's projection is Hon Hai Precision(OTC: HNHPF), better known as Foxconn. Foxconn's management believes the AI server industry, including hardware, software, and services, will grow at a stunning 42% annual growth rate between 2022 and 2032, rising from $40 billion in 2022 to $400 billion by 2027 and an eye-watering $1.3 trillion by 2032.
If these astonishing growth rates make you skeptical, consider these recent data points. According to an IDC study commissioned by Microsoft in November of last year, for every $1 a company spends on AI, it achieves an average $3.50 return on that investment, with the top 5% efficient companies achieving an $8 return for every dollar invested.
And that's just today. Keep in mind, with every generation of chips, AI systems are going to get better and better with every passing year. On a recent podcast, noted futurist Ray Kurzweil predicted that AI systems will surpass human intelligence by 2029, and also admitted that prediction may in fact be "conservative."
Given the hypercompetitive nature of business today, it's no surprise that corporations are spending on AI hand over fist, and probably will for years to come.
Image source: Getty Images.
Super Micro is getting an outsize bite of the AI pie
While a skyrocketing industry is good for Super Micro, Super Micro also is getting an extra bite of the apple by taking market share across the server industry amid the AI transition. One can point to a number of reasons for this, including Super Micro's "Lego-like" building-block server architecture, close ties to Silicon Valley chipmakers, and focus on energy efficiency and power-saving technologies such as liquid cooling.
But whichever way one slices it, Super Micro appears to be winning in AI servers. For the past few quarters, Super Micro has noted that it now gets over half of its revenue from AI/GPU server systems, leading to a stunning 73% quarter-over-quarter and 103% year-over-year growth rate last quarter.
While competitor comparisons are somewhat imperfect, original equipment manufacturers (OEMs) Dell Technologies(NYSE: DELL) and HP Enterprise(NYSE: HPE), its main rivals, have each reported a lower percentage of their server revenue coming from AI systems. Dell's AI-optimized server revenue of $800 million equated to just 8.5% of its total infrastructure segment's revenues, or about 16.5% of its non-storage server revenue last quarter. Meanwhile, HPE noted that about 25% of its server orders since the beginning of last year were for accelerated computing/GPU systems. Those relatively low percentages meant Dell and HPE saw relatively lackluster overall growth, with their total server revenue actually falling last quarter, as the traditional server business is still in a downturn.
Super Micro's biggest competition may not come from these large branded OEMs at all, but rather the "white label" ODMs like Foxconn that sell parts directly to large cloud companies who make their own servers and even sell parts to other branded OEMs like Dell and HP. In its recent earnings call, Foxconn noted that only about 30% of its 2023 server revenue came from AI servers -- higher than Dell/HP but significantly lower than Super Micro. While some parts such as GPU modules are seeing 100% growth, Foxconn still projects only about 40% overall AI server growth growth this year, with AI servers growing to about 40% of its overall server revenue in 2024.
Super Micro garnered only about 5.3% share of the branded OEM server market last year, compared with 19.3% for Dell and 13% for HP, according to History-Computer. But its market share was even smaller when compared to the entire server market including ODMs, whose direct sales account for about 25% of the server market. Factoring that in, and Super Micro's current market share falls under 4%.
When a small market-share company begins to take significant market share from larger players, it could signal a disruptive event. And industry disruption usually leads to eye-opening growth and stock market returns.
Welcome to the big leagues
Validation of Super Micro's recent ascent came from its recent acceptance into the S&P 500 index, which was announced earlier this month but is actually officially happening today. At a $60 billion market cap, both Super Micro and trendy footwear company Deckers Outdoor will be replacing Whirlpool and Zion's Bancorp in the vaunted index today.
Aside from the prestige that comes with officially cracking the top 500 U.S. companies, Super Micro may also benefit from the "forced buying" of shares from index funds which are designed to track this index. Unsurprisingly, the funds that track the most "generic" index is the most popular type of index fund in the world, so there should be significant buying of the stock beginning this week.
With the diversified mix of the largest, most liquid, and "safest" stocks, it's no wonder that S&P 500 index funds are a favorite of Warren Buffett, who recommends putting all of one's money into an S&P 500 index fund if one doesn't have the time to research individual stocks.
It's been an amazing journey to get to this point. In fact, five years ago, Super Micro wasn't even listed on a major exchange. Its stock had been kicked off the Nasdaq and was trading over-the-counter, after problems in the company's accounting controls weren't remedied in time for regulators back in 2018.
But with Super Micro's fixing its internal controls, its readmission to the Nasdaq in January 2020, and its harnessing the AI revolution, look how far it's come. With S&P 500 admittance, the stock seems set to become even more of a household name.
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Billy Duberstein has positions in Microsoft and Super Micro Computer and has the following options: short January 2025 $110 puts on Super Micro Computer, short January 2025 $125 puts on Super Micro Computer, short January 2025 $130 puts on Super Micro Computer, short January 2025 $280 calls on Super Micro Computer, and short January 2025 $85 puts on Super Micro Computer. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
