1 AI stock that has split and is worth buying before it rises 195%, according to some Wall Street analysts
Nvidia He has led the S&P 500 Index (SNP INDEX: ^GSPC) This year, the company's stock has surged amid a surge in interest in artificial intelligence (AI). The stock is up 136% since January, and Wall Street analysts are forecasting an average 30% increase from the current share price of $115. But betting on just one AI stock is a bad strategy.
Consulting firm PwC estimates that AI will add more than $15 trillion to the global economy by 2030, and numerous companies will benefit as the technology spreads across different industries. So, instead of focusing solely on Nvidia, investors should forget about the chipmaker (temporarily) and consider the server maker. Supermicrocomputer (NASDAQ: SMCI).
Super Micro has a 10 for 1 stock split scheduled for late September, so the stock will begin trading on a split-adjusted basis on Oct. 1. Two analysts, Nehal Chokshi at Northland Securities and Hans Mosesmann at Rosenblatt Securities, value Super Micro at $1,300 a share, implying a 195% upside from its current share price of $440.
Here's what investors need to know.
Super Micro Computer is the market leader in AI servers
Super Micro develops accelerated computing platforms, including storage and server systems, for enterprise and cloud data centers. Its portfolio includes individual appliances and entire server racks optimized for workloads such as data analytics and artificial intelligence (IA). What sets Super Micro apart is its in-house manufacturing capabilities and modular approach to product development.
Specifically, the company uses electronic “building blocks” that can be quickly assembled to form a wide range of servers. It also handles most of the assembly and testing in-house to enable rapid prototyping and product launches. That typically allows Super Micro to bring new technologies to market two to six months ahead of its competitors, according to Chief Executive Officer Charles Liang.
Hans Mosesmann highlighted that advantage in a note earlier this year: “Super Micro has developed a model that is very, very fast to market. They typically have the broadest product portfolio when a new Nvidia product comes out or AMD either Intel“That advantage has helped Super Micro secure a leadership position in the AI server market.
This puts the company in an enviable position. Statista estimates that AI server sales will grow by 30% annually through 2033 as companies build out their AI infrastructure. If Super Micro can maintain its time-to-market advantage, its revenue and profits could rise at a similar rate over the next decade.
Super Micro shares have fallen sharply due to lackluster financial results and a short and scathing report
Super Micro reported mixed financial results for the fourth quarter of fiscal 2024 (ending June 2024). Revenue rose 144% to $5.3 billion, but gross margin contracted nearly six percentage points to 11.2% and non-GAAP earnings rose 78% to $6.25 per diluted share. Investors interpreted the weak margins as evidence of increased competition in the AI server market.
However, management attributed the issue to costs associated with direct liquid cooling (DLC) components. Importantly, the company expects gross margin to normalize to between 14% and 17% by the end of fiscal 2025 as DLC solutions ship in greater volume. Additionally, investments in DLC solutions could strengthen Super Micro’s position in the AI server market. Liquid cooling is more efficient than traditional air cooling and will become increasingly important as AI servers become more powerful.
Still, the stock fell 20% following the fourth-quarter report on concerns about shrinking margins. And the stock fell further in late August when short-seller Hindenburg Research attacked Super Micro with allegations of “clear accounting red flags, evidence of undisclosed related-party transactions, sanctions and export control lapses, and customer issues.” Shortly afterward, Super Micro delayed filing its Form 10-K, and several analysts downgraded the stock due to the uncertainty arising from the situation.
However, CEO Charles Liang dismissed Hindenburg's report as containing “false or inaccurate statements about our company, including misleading presentations of information we have already shared publicly.” He also wrote: “We do not anticipate any material changes to our fourth quarter or fiscal 2024 financial results. This is welcome news. I continue to have great confidence in our financial and internal teams.”
Investors should keep an eye on the situation. Hindenburg has uncovered serious wrongdoing at certain companies in the past, but on other occasions its reports have been ultimately inconsequential. Either way, the allegations make the stock risky right now, despite being down 63% from its peak.
Super Micro shares are trading at a bargain price, but only for risk-tolerant investors
Wall Street expects Super Micro’s adjusted earnings to grow 41% annually through fiscal 2026 (ending in June 2026). That makes the current valuation of 20 times earnings look cheap. Those numbers give a PEG ratio of 0.5, a substantial discount to the three-year average of 0.9. But Super Micro stock also looks cheap compared with the rival server maker. Dell Technologieswhich has a PEG ratio of 1.7.
Personally, I think risk-tolerant investors should consider buying a small position in Super Micro today. The stock could bounce back significantly if the near-term sales report is flat and the company's gross margin expands in the coming quarters. That said, the stock could fall much further if either of those scenarios go wrong.
Should You Invest $1,000 in a Super Micro Computer Right Now?
Before buying Super Micro Computer stock, consider the following:
He Motley Fool Stock Advisor The team of analysts has just identified what they believe to be the Top 10 Stocks for investors to buy now…and Super Micro Computer wasn't among them. The 10 stocks that made the cut could produce monster returns in the years ahead.
Consider when Nvidia I made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, You would have $708,348!*
Stock market advisor offers investors an easy-to-follow blueprint for success, including guidance on how to build a portfolio, regular analyst updates, and two new stock picks each month. Stock market advisor The service has more than quadruple the return of the S&P 500 since 2002*.
*Stock Advisor performance as of September 16, 2024
Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 call options on Intel. The Motley Fool has a Disclosure Policy.
Forget Nvidia: An AI stock that has split into shares and you should buy before it soars 195%, according to some Wall Street analysts Originally published by The Motley Fool
