Potential Doubling of SMCI Stock Value?
Title: Super Micro Stock Soaring Despite Regulatory Concerns: Is the Valuation Justified?
In the realm of tech stocks, Super Micro Computer (NASDAQ: SMCI) has been a standout performer, skyrocketing nearly 13 times over the past three years from a humble $4 per share in February 2022 to a impressive $56 today. This growth spurt can be attributed to the surging demand for server systems, particularly fuelled by the rise of generative artificial intelligence. However, in 2024, the stock took a sharp downturn, plummeting as much as 80% due to regulatory issues, such as a delayed filing of its annual 10-K report with the SEC, allegations of accounting irregularities from short-seller Hindenburg Research, and the departure of its public auditors.
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Currently, Super Micro shares trade at approximately 25x estimated trailing earnings and 15x projected FY'26 earnings (fiscal years ending in June). Is this valuation justified? Certainly! The company's earnings are projected to almost double from FY'24 levels in the coming years. Furthermore, concerns pertaining to governance could lessen. In its recent Q2 update, Super Micro confirmed that its delayed 10-K report is scheduled for submission to the SEC by February 25. A few months prior, the company conducted an internal examination led by a special board committee consisting of legal and forensic accounting experts, which found no evidence of wrongdoing or misconduct. This optimistic outlook, coupled with the stock's 60% growth year-to-date, may suggest continued upward momentum.
Super Micro's History of Growth
Despite fluctuations in market conditions, Super Micro has posted gains for the past four years. The stock yielded returns of 39% in 2021, 87% in 2022, 246% in 2023, and 7% in 2024. Meanwhile, the Trefis High-Quality Portfolio, comprising 30 stocks, has proven steadier while outperforming the S&P 500. This is due to its ability to generate strong returns with reduced volatility, as shown in HQ Portfolio performance metrics.
Revenue Growth on the Rise
As a provider of data center solutions, Super Micro offers server systems, storage, networking products, and management software. The company is projected to witness upward of 60% revenue growth in FY'25, reaching approximately $24 billion. This soaring revenue can be attributed to strong data center investments in AI and accelerated computing, and increased demand for advanced GPUs such as Nvidia's Blackwell, which require improved infrastructure. Additionally, emerging AI models that process multimodal content (text, speech, images, video, and 3D) are spurring heightened demand for high-performance computing. Super Micro's FY'26 revenue forecast of around $40 billion suggests that growth may quicken to 70% that year.
Margins Enhanced by Efficiency and Economies
Besides strong revenue growth, Super Micro's adjusted net margins have been on an upward trajectory, rising from about 6% in FY'22 to roughly 9% in FY'24. This improvement is primarily due to economies of scale and a shift toward higher-end products. Despite recent pressure on gross margins due to liquid-cooling systems' cost, efficiency enhancements in the supply chain could stabilize profitability. Additionally, slowed expansion of fixed costs, such as R&D and selling expenses, could further fortify margins. This projected increase in adjusted net margins to around 13.5% by FY'27 seems reasonable given the company's optimistic outlook.
Valuation MultipleMay Slower its Fall
If revenue expands by 3.6x and adjusted net margins augment by 1.5x by FY'27, earnings may increase by up to 5.5x. If earnings grow at this rate, the P/E ratio would typically plummet towards about a fifth of its current level—assuming no change in stock price. However, investors anticipate Super Micro's stock to continue its upward trajectory. Rather than a drastic reduction in P/E to less than 5x, it could stabilize around 12.5x. This suggests that Super Micro stock may more than double, potentially reaching $140 per share in the medium term.
Though the exact timing of this potential increase—whether in 2 or 3 years—is less relevant than the overall trend, as long as revenue growth and margin expansion persist, the stock is likely to respond favorably. To learn more about Super Micro's risk-adjusted returns compared to the S&P 500, explore our analysis of Super Micro Computer Sharpe Ratio.
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- Despite the 80% decrease in Super Micro's stock price in 2024 due to regulatory issues, investors might find justification in the current SMCI valuation of 25x estimated trailing earnings and 15x projected FY'26 earnings, given the company's projected earnings growth and lessening concerns.
- Regarding the delayed 10-K report submission by Super Micro, the company confirmed that it will be submitted to the SEC by February 25, 2024, following an internal examination conducted by a special board committee.
- In 2023, SMCI revenue increased by 60%, and the company is projected to witness more than 60% revenue growth in FY'25, reaching approximately $24 billion, primarily due to strong data center investments in AI and advanced GPUs.
- As Super Micro's stock price approaches $140 per share in the medium term, investors might agree to suspend their concerns about the company's regulatory issues and accounting irregularities allegations, if the company's revenue growth and margin expansion persist favorably.
