[Stock Analysis] SMCI - Super Micro Computer, Inc

Unleashing a wave of excitement and paving the path for an Artificial Intelligence revolution, OpenAI has taken the world by storm with the introduction of its groundbreaking creation, ChatGPT. As history has shown us during times of such technological revolutions, nimble and agile companies often seize the opportunity to surpass industry leaders. We need look no further than the classic tale of Microsoft, which outmaneuvered the once-dominant IBM during the transformative era of personal computers.

In this analysis, we turn our attention to a company that may not be directly reaping the benefits of the AI revolution, but nevertheless holds tremendous potential to disrupt the status quo. While its impact may not rival the magnitude of the Microsoft-IBM upheaval, this company possesses the agility and innovation necessary to challenge the current market leaders. Remarkably, its stock is currently undervalued, presenting an attractive investment opportunity for astute investors.

Industry Analysis

In the AI-driven landscape of today, computational power has become a crucial determinant of business success. Recognizing the limitations of relying solely on cloud services, which include issues such as information security and availability, companies are increasingly exploring the construction of their own bare metal infrastructure. This involves the establishment of high-performance server centers equipped with a series of supporting facilities and solutions. The enterprise server solutions industry emerges as a key beneficiary, presenting an attractive investment opportunity as businesses seek to bolster their computational capabilities in the AI era.

By investing in companies specializing in enterprise server solutions, investors can tap into the growing demand for cutting-edge infrastructure that supports the computational requirements of AI applications. These companies offer a range of critical components needed for efficient server centers, including optimized racks for space utilization, reliable power supply systems, robust network connectivity, scalable data storage solutions, advanced cooling technologies, and emergency backup mechanisms. As businesses continue to prioritize the development of their own server infrastructure, the enterprise server solutions industry is poised to thrive, making it an enticing avenue for investors looking to capitalize on the AI revolution.

In the enterprise server solutions industry, the two most prominent players are HPE (HPE) and Dell Technologies Limited (Dell), neck-to-neck occupying 15.7% and 15.8% of market share respectively. While Super Micro Computer reports a revenue of $5.20B, which is roughly one sixth of HPE.

Quantitative Analysis

PS ratio

In this analysis, we consider PS ratio the most informative indicator to compare companies within a growing industry.

During the growth stage, companies prioritize revenue and market share accumulation, focusing on expanding their customer base and establishing a strong presence in the industry. The PS ratio becomes particularly relevant in this context, as it helps investors assess whether a company's valuation is justified relative to its revenue generation potential.

In the case of SMCI its remarkable PS ratio of 0.76, which stands it out among mid-cap stocks. This figure is roughly comparable to its competitor, HPE with a 0.71. The similarity in their PS ratios suggests that both companies are valued similarly relative to their revenue.

On the other hand, Dell's lower PS ratio of 0.3 can be attributed to the fact that it operates in both the enterprise server solutions market and the consumer PC and electronics markets. The consumer PC and electronics market typically has lower net margins compared to enterprise solutions, which causes an overall low PS ratio of the company. For further context, the ratio of HPQ (0.47) and Lenovo (0.17) can be referenced.

PE ratio

While revenue-seeking ability is important, it's indeed essential to consider a company's profit-earning ability as well. The Price-to-Earnings (PE) ratio provides valuable insights into a company's profitability and its valuation relative to its earnings.

In terms of forward PE ratios for 2023, SMCI stands slightly higher compared to Dell and HP. This suggests that investors are willing to pay a relatively higher price for SMCI's expected earnings in the future. The slighter higher PE ratio can be seen as an indication of the market's heightened expectations for SMCI's growth potential. However, the differences among the companies remain comparable.

Overall

In the realm of revenue-seeking and profit-earning indicators, SMCI stands on par with its competitors, Dell and HP. However, the market has yet to fully price in SMCI's consensus growth expectations, which exceed 10% year-over-year, while Dell and HP hover around 5%.

Qualitative Analysis

When conducting qualitative analysis, one crucial aspect to consider is a company's ability to adapt and respond swiftly to the evolving landscape of computation devices. In this regard, SMCI has been reported to possess higher flexibility compared to its competitors, Dell and HP.

A closer examination of SMCI's product line, as showcased on their official website, reveals a focus on providing comprehensive coverage for timely and cutting-edge applications. This includes a strong emphasis on High-Performance Computing (HPC) and extensive computation scenarios utilizing GPUs, which aligns well with the current advancements in AI development.

On the other hand, Dell and HP, being larger and more established companies, tend to exhibit a more conservative approach in their product lines and decision-making processes. Dell, in particular, is known to carry a significant amount of debt. This debt burden may potentially inhibit their willingness to frequently adjust their product offerings to adapt to new market trends and technological advancements.

By showcasing higher flexibility and a product portfolio that aligns with emerging trends, SMCI demonstrates its ability to capitalize on new opportunities and cater to the evolving needs of the market. This adaptability can be a significant advantage in an industry driven by rapid technological advancements and changing customer demands.

The Semiconductor Alliance

Another noteworthy observation in the semiconductor industry is the presence of close alliances and relationships among firms with Taiwan origins or backgrounds, despite their production or business bases being located elsewhere. Examples of such companies are TSM, NVDA, and ASX.

In this context, SMCI, which is within this circle, has also established collaboration agreements with NVDA. These collaborations signify a strategic partnership between SMCI and NVDA, likely aimed at leveraging each company's expertise and resources to drive innovation and market competitiveness.

SMCI's position within this alliance-like network further solidifies its competitive position within the enterprise server market, reinforcing its potential access to cutting-edge technologies and market opportunities.

Economic Moats

While SMCI operates in the competitive enterprise server market, its relatively smaller size and lower market share raise concerns about its moat. Larger players like Dell and HPE have established strong customer relationships, brand recognition, and distribution networks, giving them a competitive advantage. Additionally, the ever-evolving nature of the industry with new entrants and disruptive technologies presents challenges for maintaining a sustainable competitive advantage.

However, it's important to consider SMCI's unique qualities. The company offers flexibility and specializes in niche areas such as high-performance computing and GPU-intensive computations, which can differentiate it from its competitors. SMCI's ability to adapt quickly to emerging trends like AI development provides opportunities for growth and market share capture.

Investors should carefully evaluate the risks associated with SMCI's weaker moat while recognizing its potential for resilience and growth. Investors should especially judge whether SMCI can position itself effectively in the enterprise server market, by monitoring industry dynamics and focusing on innovation and strategic partnerships.

Conclusion

In conclusion, SMCI presents an enticing investment opportunity in the enterprise server industry. The company's strong growth potential, focus on innovation, and strategic partnerships position it for success. Despite facing competition from larger players, SMCI is well-positioned to capitalize on emerging trends and carve out a niche in the HPC server facility market.

With a projected annual growth rate of 15% over the next five years, I would consider its target price of $160, referencing a forward PE ratio of 16.