The S&P 500 (SNPINDEX: ^GSPC) is the most widely followed benchmark in the U.S. and is made up of the 500 largest companies in the country. Given the breadth of its membership, it is considered by many to be the most reliable indicator of overall stock market performance.
To be included in the S&P 500, a company must meet certain criteria:
-
Be based in the U.S.
-
Have a market cap of at least $8.2 billion
-
A minimum of 50% of its outstanding shares must be available for trading
-
Must be profitable under generally accepted accounting principles in its most recent quarter
-
In aggregate, must be profitable over the preceding four quarters
Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, is one of the most recent additions to the S&P 500, joining the fold in March and one of only eight companies added to the index so far this year.
Furthermore, the AI-centric server maker recently announced a 10-for-1 forward stock split, generally the province of companies with years of strong operating and financial results. Since the beginning of 2023, Supermicro shares have surged 500% as the rapid adoption of generative AI supercharged its sales and bolstered its profits.
Despite its blistering gains, many on Wall Street believe there’s more upside ahead. Let’s look at what sets Supermicro apart and whether it’s a buy.
Catapulted to stardom
Supermicro has been creating custom server solutions for about three decades, but this experience had customers clamoring for its services when generative AI burst on the scene early last year. The company offers a variety of servers and storage systems, from plug-and-play rack scale systems to modular building block components.
The company also provides support services to help customers “install, upgrade, and maintain their computing infrastructure,” according to a regulatory filing.
Management also cites strong partnerships with all the biggest chipmakers as a competitive advantage, keeping Supermicro supplied with all the latest and greatest processors. Furthermore, the company’s focus on energy efficiency has become a hot ticket during the AI boom.
The past year has been transformational for Supermicro. During fiscal 2024 (ended June 30), revenue of $14.9 billion soared 109% year over year, while its earnings per share (EPS) of $20.09 jumped 76%. Management notes that sales have increased five times faster than the industry average during the past 12 months, which shows that the company is gaining market share from its rivals.
That said, this unprecedented growth spurt hasn’t been without challenges. In the most recent quarter, the company experienced significant pressure on its margins, which it attributed to a change in product mix and a shortage of certain server components, which pushed $800 million in sales into the next quarter.
Chief financial officer David Weigand addressed the issue, saying, “We have a path to improve gross margins to the target range of 14% to 17% as we introduce innovative platforms based on multiple new technologies from our strategic partners and improved manufacturing efficiencies on our DLC [direct liquid cooling] solutions.” It’s clear that management views this as a short-term issue.
The company has also been scrambling to keep up with demand, expanding its existing production capability while bringing new facilities on line. These steps will give Supermicro the ability to achieve $50 billion in sales in the coming years, up from $15 billion this year.
If the company can work through its growing pains, chances are good the stock will resume its upward trajectory.
Analysts are still bullish on Supermicro
Wall Street rarely agrees on anything, so it’s worth noting that the majority of analysts who cover the stock believe there’s still significant upside ahead. Of the 17 analysts who covered the stock in July, 12 maintain a buy or strong buy rating, and none recommend selling. An average price target of roughly $1,000 suggests they believe the stock could more than double compared to Wednesday’s closing price.
However, Loop Capital analyst Ananda Baruah is even more bullish than his Wall Street colleagues, assigning a buy rating and a Street-high price target of $1,500. This suggests potential gains for investors of 204% compared to Wednesday’s closing price.
The analyst cites Supermicro’s leadership in “both complexity and scale.” Baruah went on to say the company could more than double its revenue run rate to $40 billion over the coming two years.
Despite the stock’s meteoric rise since early last year, it’s still attractively priced, selling for roughly 2 times sales, the very definition of a reasonably priced stock.
For investors with the appetite for some additional risk and a stomach for volatility, Supermicro appears poised to ride the AI revolution to new heights, which could enrich shareholders along the way.
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.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $643,212!*
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 quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
Danny Vena has positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Meet the Newest Stock-Split Stock in the S&P 500. It Soared 500% Since Last Year, and Wall Street Says It’s Still a Buy Right Now. was originally published by The Motley Fool
Source: finance.yahoo.com