Super Micro Computer (NASDAQ: SMCI) was a top performer on the stock market in 2023 with eye-popping gains of 246%. The market rewarded the company handsomely for its impressive growth and prospects, and the good news is that it has gotten off to a solid start in 2024 as well.

Shares of the company, whose server platforms are in great demand thanks to the proliferation of artificial intelligence (AI), have shot up nearly 20% in the new year already. While there has been no company-specific news, it looks like the overall bullishness around AI seems to be lifting Supermicro.

More specifically, investment banking firm Oppenheimer‘s recommendation to buy AI chip stocks such as Nvidia, Broadcom, and Marvell Technology seems to have rubbed off on Supermicro. That’s not surprising as the growing demand for AI chips, especially those that are deployed in servers for training large language models (LLMs), will positively impact Supermicro’s sales.

Super Micro Computer is at the beginning of a massive growth curve

Supermicro provides modular server and storage technology for various applications such as cloud computing, enterprise data centers, AI, and telecommunications. The company has made a smart move by optimizing its platforms for AI servers, a market that’s growing at a breathtaking pace right now.

For example, in May last year, Supermicro released liquid-cooled rack-scale platforms for installing Nvidia’s H100 AI graphics cards. Supermicro claimed that its AI-optimized, liquid-cooled server racks could reduce power consumption in a data center by an estimated 40% when compared to air-cooled data centers. The company also points out that its H100-focused liquid-cooled racks can reduce cooling costs in existing data centers by as much as 86%.

Not surprisingly, Supermicro saw a massive jump in demand for its server racks as the sales of Nvidia’s H100 processors boomed. Nvidia reportedly sold 1.5 million units of the H100 in 2023, a number that’s expected to hit 2 million this year. At the same time, it is worth noting that Nvidia is set to bring new AI chips to the market this year, such as the updated H200 AI GPU and the GH200 Grace Hopper Superchip.

These new chips explain why Nvidia is busy securing a bigger supply of components in 2024 so that it can increase its shipments. The good part is that Supermicro is already in a position to capitalize on these new Nvidia chips that are about to hit the market with optimized server solutions. For instance, Supermicro started shipping platforms optimized for the GH200 in October 2023, and it has updated its product lineup to include H200-optimized servers as well.

More importantly, the market for AI servers is expected to grow at an eye-popping pace for a long time. According to contract electronics manufacturer Foxconn, sales of AI servers could hit a whopping $150 billion in 2027 from just $30 billion last year. Supermicro is in a nice position to capitalize on this opportunity as it gets more than half of its revenue from selling AI-optimized platforms, and it is quick to release updated products to accommodate new chips from market leaders such as Nvidia.

As a result, it won’t be surprising to see Supermicro sustaining its terrific growth rate for a long time to come.

Buying this AI stock is a no-brainer thanks to its terrific growth and cheap valuation

Supermicro expects to finish fiscal 2024 with revenue of $10 billion to $11 billion, which would be a 49% jump over the previous year’s figure of $7.12 billion at the midpoint. What’s more, consensus estimates are projecting a 46% increase in the company’s earnings in the current fiscal year to $17.28 per share. However, it won’t be surprising to see that estimate move higher as Supermicro has been busy boosting its production capacity.

The company expects to boost its capacity in the Asia-Pacific region by 2 to 3 times in the current fiscal year with the help of a new facility in Taiwan. Additionally, its Malaysia campus is expected to go online in the third quarter of 2024. Supermicro believes that its capacity additions could eventually help increase its revenue capacity to $20 billion, a target management believes could be “just a couple of years away.”

If that’s indeed the case, Supermicro’s top line could increase at a compound annual growth rate of 38% in fiscal years 2025 and 2026 (using fiscal 2024’s estimated revenue of $10.5 billion as the base). That’s why investors should consider buying this AI stock right now as it is trading at just 2.6 times sales. What’s more, the company’s price/earnings-to-growth (PEG) ratio of 0.94 suggests that it is undervalued right now.

However, Super Micro Computer stock may not be available at such attractive multiples for long given the impressive momentum it has already gained in 2024, which is why it would be a good idea for savvy investors to buy it before it soars higher.

Should you invest $1,000 in Super Micro Computer right now?

Before you buy stock in Super Micro Computer, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Super Micro Computer wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of January 8, 2024

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom, Marvell Technology, and Super Micro Computer. The Motley Fool has a disclosure policy.

This Super Artificial Intelligence (AI) Stock Has Surged 20% in 2024 Already. Here’s Why It Is Still a Screaming Buy. was originally published by The Motley Fool

Source: finance.yahoo.com