Super Micro Computer Inc.'s (SMCI, Financial) share price experienced a dramatic daily surge, soaring over 34% following its optimistic guidance for second-quarter operating results. This increase was fueled by robust market demand and strong interest from end customers in the company's artificial intelligence servers. Over the past 12 months, shareholders have witnessed a remarkable 474% rise in the share price, skyrocketing from around $76 to $436. Given the bullish market response that has significantly driven up the share price, I believe that Super Micro Computer is currently overvalued.
Leader in high-performance solutions
Super Micro Computer is a leader in providing application-optimized, high-performance server and storage systems tailored to various markets and customers, including data centers, cloud computing, artificial intelligence and edge computing. The company offers an extensive product range, encompassing server and storage systems, server software management solutions and Supermicro global services. It has established a significant direct sales presence, reaching more than 1,000 customers in over 100 countries. Additionally, the company extends its reach to thousands of end users through a robust indirect sales channel. Super Micro Computer collaborates with several third-party suppliers and contract manufacturers for product design and manufacturing. Notably, it utilizes the expertise of Ablecom Technology and its affiliate, Compuware Technology, to provide critical support in contract design and manufacturing coordination.
Super Micro Computer's strategic approach is anchored in its strong engineering focus, with engineers making up half of its workforce. This engineering-centric philosophy enables it to swiftly integrate emerging technologies from major players like Nvidia (NVDA, Financial), Advanced Micro Devices (AMD, Financial), Intel (INTC, Financial) and ARM (ARM, Financial) into its innovative building block solutions. By designing and customizing solutions in-house, Super Micro sets itself apart from competitors, offering products that are not only cost-effective, but also excel in low power consumption and efficient heat management.
High growth in revenue and profit
Over the past decade, Super Micro Computer has achieved remarkable growth in revenue and operating profit. The company saw its revenue increase in nine out of 10 years, with the only exception being a 4.6% decline in 2020, a direct result of the short-term business disruptions caused by the Covid-19 pandemic. In the past 10 years, its revenue climbed from just over $1.16 billion in 2013 to $7.12 billion in 2023, reflecting a compounded annual growth rate of nearly 20%.
While there was significant volatility in operating income, it followed a strong upward trend. Starting from $27.16 million in 2013, the operating income soared to more than $761 million, yielding a high annual compounded rate of return of 39.6%. The growth in operating income was particularly noteworthy in 2022 and 2023, with increases of 170% and 127%. This substantial growth in operating income can be primarily attributed to the surge in revenue, increased gross profit and relatively much lower growth in operating expenses, including research and development, as well as selling, general and administrative expenses.
Growth strategies and bullish guidance
A key aspect of Super Micro Computer's strategy is emphasizing green computing, mainly through the advancement in liquid cooling technology. The company believes this technology can reduce data center operating costs by up to 40%, and it projects that within a few years, 20% of data centers will adopt liquid cooling to address the growing heat output challenges from GPUs and CPUs.
In terms of market growth, the company has seen significant expansion, largely fueled by its advancements in artificial intelligence technologies and their ability to be the first to market with a comprehensive set of solutions. The company is keen on continuing to ride this wave of growth, focusing on AI solutions to meet the increasing market demand. It plans to sustain its growth trajectory by offering optimized solutions across various applications, such as online gaming, cybersecurity and cloud-based storage, ensuring it remains at the forefront of technological innovation and market needs.
Along with the bullish market sentiment, Super Micro Computer recently revised its guidance for second-quarter operating performance upwards, with anticipated sales now expected to be between $3.60 billion and $3.65 billion. This is a significant increase from the previous forecast of $2.70 billion to $2.90 billion. In terms of adjusted earnings per share, the company anticipates an improvement to the range of $5.40 to $5.55, up from the initial estimate of $4.40 to $4.48. This new guidance surpasses analysts' expectations for the second quarter, set at $2.84 billion in revenue and earnings per share of $4.55. At midpoints, these revised projections indicate a 29% rise in revenue and a 24% increase in non-GAAP net income compared to Super Micro Computer's earlier guidance.
Strong balance sheet for stability
Super Micro Computer maintains a conservative capital structure. The company's balance sheet shows a strong foundation with $2.17 billion in shareholders' equity and total assets of more than $4 billion. Notably, a large portion of its assets are tied up in inventories valued at over $2 billion. This reflects a strategic focus on maintaining a robust inventory to meet customer demand efficiently. Furthermore, Super Micro Computer has relatively low interest-bearing debt of $146.2 million and significant cash and cash equivalents of $543 million. This results in a net cash position of approximately $397 million, indicating a healthy financial state with ample liquidity. Such a conservative approach to capital management positions the company well for sustained growth and financial stability.
Quite overvalued
Upon reviewing the historical valuation chart, it becomes apparent the market has overreacted to the bullish momentum surrounding Super Micro Computer. Currently, the company is being valued at a multiple of 32 times earnings before interest and taxes, which represents the highest valuation it has seen since its initial public offering in 2007. It is worth noting that the company's average EBIT multiple since its IPO has only hovered around 11.30 times.
The second-quarter revenue estimates indicate a substantial 71% increase compared to the first quarter. Considering a conservative scenario where the company maintains a sequential revenue growth rate of 20% for the remaining two quarters of 2024, the projected revenue for the year could easily reach $15.3 billion. With an average operating margin of 4.7%, the operating profit could be $719 million.
Applying the historical average Ebit multiple of 11.30 to this scenario, Super Micro Computer's valuation would be only approximately $8.10 billion. On the more optimistic side, if we apply a higher multiple of 25, the company's valuation would be $18 billion. However, it is important to note that even in this bullish scenario, the valuation would still be 25% lower than the current enterprise value of $24 billion.
The bottom line
Super Micro Computer has undeniably caught the attention of investors with its remarkable share price surge and optimistic guidance for the second quarter. The company's strategic focus on engineering-centric innovation and the aggressive pursuit of AI technologies further solidify its position as a key player in the industry. However, the stock market seems to have overreacted to the company's positive outlook, potentially creating an elevated level of risk for investors if it does not live up to these high expectations. I think investors should wait for a correction before initiating a long position.
