supercomputer (NASDAQ: SMCI) Supermicro has been one of the hottest stocks on the market this year, up a whopping 73% as of this writing, but a closer look at the stock’s recent performance suggests that its bull run is over. In fact, Supermicro shares (as the company is known) are down 58% since hitting a 52-week high on March 8.
However, the company, which makes server and storage solutions, has been enjoying tremendous growth thanks to increased demand for artificial intelligence Servers are a hot industry. Let’s take a closer look at Supermicro’s prospects and see if the recent pullback in the stock represents a buying opportunity.
The recent decline in the stock does not seem justified.
Supermicro Inc. released its fiscal 2024 fourth-quarter results for the three months ended June 30 on August 6. The company’s revenue for the year surged a staggering 110% to nearly $15 billion. Adjusted earnings also nearly doubled to $22.09 per share from $11.81 per share in fiscal 2023. Add to that the stock’s attractive valuation, and it looks like investors would do well to buy it now.
Supermicro’s price-to-sales ratio is just 2. That’s a significant discount to the U.S. tech sector’s multiple of 7.8. Meanwhile, Supermicro’s price-to-sales ratio is just 2. Future earnings multiples Supermicro’s share price of just $14 is also cheaper than the US tech sector’s earnings multiple of $45. We’ve already seen how fast Supermicro can grow, and the recent pullback has given investors a solid entry point into this stock that could sustain its impressive growth for a long time to come.
Investors should focus on the bigger picture.
Revenue estimates for fiscal year 2025 of $26 billion to $30 billion suggest that the company could double its revenues again this year. The good news is that Supermicro has a huge long-term growth opportunity in AI servers. According to one estimate, the global AI server market size could grow at a compound annual growth rate (CAGR) of 30% over the next decade, generating $430 billion in annual revenue by the end of the forecast period. This would be a more than tenfold growth from the $40 billion in revenue that the AI server market is expected to generate in 2024.
Supermicro is one of the best ways to capitalize on this huge growth opportunity as the company’s share of the AI server market is expected to continue to grow well into the future. According to Bank of AmericaSupermicro controlled 10% of the AI server market last year. Its share of the market is expected to grow to 17% by 2026, which should come as no surprise as it has been aggressively looking to expand its manufacturing capacity.
Management has been taking ongoing steps to ensure that Supermicro can produce more server racks each month, so it can continue to grow at a tremendous pace. For example, in June, the company announced the addition of three new manufacturing facilities to meet the growing demand for liquid-cooled servers, which are becoming increasingly important due to the adoption of artificial intelligence.
It’s no surprise to see why analysts expect Supermicro’s earnings to grow at an annual rate of 62% over the next five years. Applying that growth rate to the company’s fiscal 2024 earnings of $22.09 per share implies a net profit of $246 per share after five years. If the expected earnings are multiplied by the Nasdaq 100 average earnings multiple of 32, Supermicro’s stock will be trading at more than $7,800 per share after five years.
But investors should note that Supermicro has announced a 10-for-1 stock split, which will take effect on October 1. But the stock split is a cosmetic move that increases the number of outstanding shares of the company in order to lower the price per share, and therefore does nothing to change Supermicro’s fundamentals or prospects.
If the market starts to fairly reward Supermicro stocks for their impressive growth—and they may continue to do so in the long run—it could be a huge boon for investors. That’s why investors will benefit greatly from adding these growth stocks to their portfolios while they’re still cheap.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Harash Chauhan The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Bank of America. The Motley Fool has Disclosure Policy.
1 Key Growth Stock Down 58% to Buy Before It’s Too Late Originally posted by The Motley Fool