Super Micro Computer: More Big Upside Ahead
Artificial Intelligence (“AI”) has been hot. From semiconductors, to software and social media end users, and especially datacenter infrastructure and energy demand, we have seen stock prices soaring (see table below). However, one name that stands out for both massive AI growth and an extremely low valuation, is Super Micro Computer (SMCI). Obviously, SMCI has warts on it (e.g. their auditor resigned, they’ve been dropped from the Nasdaq 100 (QQQ) and volatility has been extraordinary). However, SMCI has remained a critical part of the AI megatrend, and CEO Charles Liang believes 2025 could be a banner year (thanks, in large part, to the accelerating shift from Hopper to Blackwell GPUs). After reviewing the AI landscape and the SMCI particulars, I conclude with my strong opinion on investing.
About Super Micro Computer:
Founded by current CEO, Charles Liang, in 1993, Super Micro is headquartered in Silicon Valley just 10 miles away from its key business partner and industry leader Nvidia (also founded in 1993).
Super Micro makes server and digital storage solutions, necessary components in the AI value chain, and works extensively with Nvidia (Liang and Nvidia CEO, Jensen Huang, are long-time friends).
For example, Liang recently explained:
“Driven by sustained AI demand from both existing and new customers, our growth trajectory for fiscal year 2025 remains promising. Highlighted by the beginning of our transition from [Nvidia] Hopper to Blackwell GPUs, we expect the growth in new generation platforms to accelerate as supply ramps this quarter and beyond. We have confidence that our calendar year 2025 growth could be a repeat of calendar year 2023 if not better, assuming the supply chain can keep pace with demand.”
Worth mentioning, Super Micro has positioned itself as the innovative leader in liquid cooling technologies, which are necessary in datacenters as AI consumes increasing power and generates substantially more heat that needs to be displaced (see the following graph for perspective on growing AI energy consumption—it’s a megatrend!).
Why Super Micro? Why Now?
As mentioned, Super Micro is a key component of the AI megatrend supply chain, for example helping with the transition from Hopper to Blackwell GPUs, as Liang explained on the latest quarterly call:
“We are excited to announce that our NVIDIA Blackwell products are shipping now. We have begun volume shipments of both air-cooled 10U and liquid-cooled 4U NVIDIA B200 HGX systems. Meanwhile our NVIDIA GB200 NVL72 racks are fully ready as well. Utilizing our system building blocks, we are going to soon offer more brand new platforms for customers seeking further optimized, higher density and even greener AI solutions. While most key component are ramping at full speed, it will take some time to fulfill our current AI solution backlogs.”
And considering its long relationship of partnering with Nvidia, SMCI is clearly positioned to continue benefiting dramatically from the AI megatrend. For example, Wall Street analysts now expect 60% profitable sales growth this year and another 39% next year (see table below). Further still, the AI megatrend is still in its early innings, as you can see in the following Statista chart.
The 5 Fingers of AI:
The following table includes individual stocks, each representing at least one of the five fingers of AI, such as chipmakers (NVDA), software (PLTR), social media (META), datacenter components (VRT) and sharply increasing energy demands (CEG).
And as you can see, many of these stocks have been experiencing extraordinary growth and share price gains, except for Super Micro—whose shares are still dramatically lower than 52-week highs (despite dramatic year-to-date share price momentum).
Super Micro’s Valuation:
For starters, Super Micro is profitable (healthy gross and net margins, see table above), is growing rapidly (outsized revenue growth, as mentioned) and trades at an unusually low valuation as compared to other AI stocks in the earlier table.
For example, Super Micro only trades at ~16x forward earnings and only a 0.1x forward PEG (price-to-earnings / growth). These metrics makes Super Micro shares extraordinarily attractive versus the other AI megatrend opportunities, especially considering the catalysts that are ramping now (e.g. Blackwell, liquid cooling, AI megatrend, and new auditor as explained later in this report).
Super Micro’s Share Price:
Why is SMCI so inexpensive?
As you can see in the chart above, Super Micro shares have been significantly volatile and currently sit well below recent highs even though the revenue has continued to grow. The reason is because of auditor drama, delisting worries and very high short-interest (i.e. people betting against the shares).
Regarding the auditor, Ernst & Young (a highly-regarded “Big-4” auditor) resigned in October, explaining:
"due to information that has recently come to our attention which has led us to no longer be able to rely on management's and the Audit Committee’s representations." EY added it is "unwilling to be associated with the financial statements prepared by management."
SMCI disagreed with E&Y, but the headline damage had already been done and the share price plummeted. Additionally, SMCI has been working with its new auditor, BDO USA, to get its financials fully audited and filed.
Regarding delisting worries, SMCI has been given an extension to file its audited financials (following E&Y’s departure) to avoid being delisted by Nasdaq. The shares were already dropped from the exchange’s Nasdaq 100 Index (after being included for only 5 short months).
And regarding short interest, SMCI has been one of the most shorted stocks in recent months as many investors bet against the shares after its previous meteoric rise (more than 20% of the shares were recently sold short, see earlier table). Super Micro has also been the target of a high-profile short report by now disbanded Hindenburg Research.
On a positive note, the beat up share price (and high short interest) create an excellent contrarian opportunity from a valuation standpoint (and from a potential short-squeeze / covering standpoint, especially ahead of the upcoming financial statement reporting extended deadline).
SMCI Risk Considerations:
From a risk management standpoint, there are a variety of things investors may want to consider.
Index and Portfolio Weighing: Super Micro is currently only about 0.06% of the bellwether S&P 500 index, so it is not a big constituent at all, and investors may want to keep that in mind when weighting the shares in their own portfolios. Unlike Apple, Nvidia and Microsoft, which are all more than 5% of the index and a big part of the economy, Super Micro is less significant and investors should remember that before betting the farm. From a position sizing standpoint, anything more than a few percent of your portfolio invested in Super Micro seems very extreme and perhaps overly risky. A prudently concentrated portfolio of top ideas continues to be a winning strategy.
Industry Cyclicality: the semiconductor server industry is highly cyclical and it has been very strong recently courtesy of the AI megatrend. Some argue this as a significant risk factor now, but it may also be an opportunity as AI has long-term legs, the transition from Nvidia Hopper to Blackwell is ramping and the valuation is very low.
Delisting Risk: As mentioned, investors are concerned if SMCI doesn’t meet the February 25th deadline to submit its audited financial statements it may be delisted from the Nasdaq exchange. However, as it appears short-covering could accelerate, any positive news on the financial statements could send the shares soaring even higher (they are still very inexpensive from a valuation standpoint and well below previous highs despite improving “unaudited” financials).
Customer Concentration: The biggest users of AI (and therefore the servers behind AI) are basically big tech (e.g. Microsoft, Facebook, Amazon, Google). And considering they’ve been spending so heavily on capex, some argue SMCI could be closer to the top of the current cycle than the bottom). However, given CEO Charles Liang’s comments and the upcoming ramp of Nvidia’s Blackwell, these concerns may be overblown (especially considering SMCI’s lead in liquid cooling), plus some estimates of continuing capex spend (see below).
Conclusion:
Super Micro shares are compelling heading into this year’s capex and Blackwell ramps, especially considering liquid cooling, the extremely low valuation, building momentum, short-covering, upcoming audited financials (hopefully soon) and because other AI plays are relatively so much more expensive.
Super Micro Computer has warts, but the best opportunities often do, and the shares are worth considering for a spot in your prudently-diversified, long-term, growth-focused investment portfolio.