How Super Micro Computer can continue its massive growth
Shares of Super Micro Computer (SMCI) have been on a tear, gaining over 254% year to date, with a market cap of almost $60 billion. The company will be added to the S&P 500 (^GSPC) on March 18.
Wedbush Securities SVP of Equity Research Matt Bryson joins Yahoo Finance to talk about Super Micro Computer's run and its mounting challenges as the company scales and faces competition in the sector.
While Bryson claims Super Micro has excelled in its efforts to rebrand itself as the leading provider of AI services, he questions whether AI can continue to grow at the present levels. Lofty targets are now priced into Wall Street's valuation, but Bryson says this doesn't present "a ton of risk" in the near term. He notes that in Q4 "it wasn't just Super Micro that was exceeding estimates in AI. You saw the same thing from Dell (DELL), you saw some of the same things with Taiwanese ODMs. They all talked to strength in Q1. I think they have visibility in Q2. Backlog was still growing through Q4 even with sales lifting. So I think in the near term there's still strong demand...In my mind it's more a question of what happens back half of '24 and into '25. That's still a bit away. "
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
Video transcript
[AUDIO LOGO]
SEANA SMITH: Super Micro Computer's rally has captured investors' attention, with shares up over 250% since just the start of the year, while the massive rally that we've seen over the last several months-- over the last several years has pushed its market cap from $4.5 billion just over a year ago at the end of 2022 to roughly $60 billion today. And the stock is going to be added to the S&P 500 later this month.
Our next guest, though, is out with a warning about long term, saying that the company could face some more competition. So what does that mean for the stock price? We want to bring in Matt Bryson. He is Wedbush Securities Senior Vice President of Equity Research.
It's great to have you here. So, many investors out there are watching shares of Super Micro Computer, watching this massive run up that we've seen in the stock. What do you think of the valuation today?
MATT BRYSON: It's trading somewhere between 30 and 40 times, depending upon what numbers you use, if you're looking at next year's earnings. So, I mean, obviously, that's influenced by their exposure to AI. And they've done a great job rebranding themselves as the leading provider of AI servers.
At the same time, you look at server companies traditionally, and they've had valuations that are more in the high single digits, low double digits. And so, it's something of a conundrum in that the question being, one, can AI revenues continue to grow at these levels? And then two, is this type of share that they've garnered at the beginning of the generative AI era sustainable?
BRAD SMITH: And so with that in mind, delivery upon some of the Street's expectations certainly in question here. What is the likelihood that they can achieve some of those lofty targets that now are priced into the stock and priced into the valuation as you were mentioning?
MATT BRYSON: Yeah, so I think in the near term, there isn't a ton of risk. So Q1-- it wasn't just Super Micro-- or Q4, it wasn't just Super Micro who was exceeding estimates in AI. You saw the same thing from Dell. You saw the same thing from some of the Taiwanese ODMs. They all talk to strength in Q2-- I mean in Q1, sorry.
And I think they have visibility in Q2. Backlog was still growing through Q4, even with sales lifting. So I think in the near term, there's still strong demand. There is still a shortage of NVIDIA GPUs, which means it's hard for share to migrate.
And so you should get strong revenues. And Super Micro should sustain share. In my mind, it's more of a question what happens back half of '24 and into '25? And that's still a bit away.
SEANA SMITH: Matt, I'm curious, from an analyst perspective, how you're looking at this debate on the Street of the AI bubble, and whether or not some of the names that fall under your coverage are being caught up within some of the hype.
MATT BRYSON: Yeah, so I mean certainly, you've seen a number of names in the semiconductor space. See a significant gains in valuation. I think that AI is going to become an underlying platform for technology, so like Microsoft OS, like iOS for handsets or Android for handsets.
And so I think moving forward, there's a ton of value in AI. And so even with valuations having lifted, it's still worth investing in. I think the questions come down to how sustainable are our competitive advantages? And what's the shift in numbers moving forward?
So you look at something like NVIDIA, I think with CUDA, they've created a moat. And we can argue about whether NVIDIA share can remain at 80%, or at some point, they're closer to 50%, 60%. But I think there's a history of semiconductor companies who enjoy a substantial share within markets. And those markets being one or two players, like we've seen in compute, where it's been pretty much Intel with a bit of AMD.
The question, I think, with Super Micro is more on the server side of things, you haven't really seen those 60%, 70%, 80% type share-- market share numbers be sustainable. So historically, Dell has been the market leader, like 30%. And so can Super Micro change that paradigm? That, I just don't know.