2023-08-07 08:00:00 ET
Summary
- I was wrong about Super Micro Computer's substantial near-term growth inflection. It is a significant beneficiary from the AI surge that lifted the valuation of it and its closest peers.
- However, SMCI's current valuation and price action suggest significant caution. I also gleaned similar warning signs from the stock of its closest Taiwanese ODM peers.
- SMCI short-sellers have been decimated, and deservedly so. However, I must highlight that I'm not bearish on SMCI. Despite that, it doesn't mean SMCI is a buy at any price.
- If the market decides to hammer its peers, I assessed that SMCI would not likely escape unscathed. I make the case why buyers shouldn't go into FOMO mode now and must remain patient. Read on.
My previous articles on Super Micro Computer, Inc., or Supermicro (SMCI), were on Hold ratings, indicating a Neutral or Market Perform thesis. While my initial SMCI article in early January 2023 preceded a steep pullback, buyers quickly returned as SMCI significantly outperformed the S&P 500 since then.
As such, my market perform rating has not panned out accordingly over the past half a year, and I must admit that given another opportunity early this year, I would have added it. However, while SMCI's valuation remains relatively reasonable (25.4x forward adjusted P/E), it's getting increasingly stretched compared to its broad peers' median or historical averages.
According to S&P Cap IQ data, it's markedly above its tech hardware peers' median of 11.6x, indicating substantial relative overvaluation. Also, SMCI's forward adjusted P/E 10Y average of 12.3x adds another layer of caution that investors must consider at this point.
However, SMCI wasn't this expensive before the AI frenzy that drove it and its closest ODM peers earlier this year. SMCI has also outperformed its Russell 2000 ( IWM ) peers, with Supermicro currently in the pole position in terms of exposure.
It should be noted that SMCI significantly outperformed even Nvidia ( NVDA ) stock since SMCI/NVDA bottomed out in April 2023. The rocket-esque surge in SMCI has left short-sellers, or bearish investors, carried out in stretchers, as they likely didn't expect such a massive reaction from market operators. I highlighted before SMCI has an uptrend bias. Therefore, it doesn't make sense to go short on SMCI. I stressed that SMCI " has a clear medium-term uptrend , indicating that long-term buyers are confident of buying the significant dips." I also added that "shorting could be a perilous endeavor."
Given the company's leadership in providing customized high-performance server solutions, it's expected to benefit significantly from the AI opportunities spurred by Nvidia, AMD ( AMD ), and Intel ( INTC ). It's also exposed to Arm-based opportunities, allowing it to leverage well-diversified growth drivers in high-performance computing.
Also, DIGITIMES reported that Supermicro " is reported to be the only one mass-producing and shipping servers equipped with Nvidia's latest H100 GPU." While its rivals Quanta Computer ( QUCCF ) and Wiwynn are expected to start shipping their Nvidia modules from Q4'23, Supermicro's near-term growth inflection has given it market leadership. Supermicro's recent prelim fiscal fourth quarter or FQ4 earnings release corroborates its significant near-growth growth drivers, as the company reported prelim revenue and earnings metrics way above its previous guidance.
My previous reticence was, therefore, wrongly conceived. Its near-term revenue growth inflection is much faster than I had expected. I also didn't factor in its superior execution capability, justifying buying sentiments. Moreover, its valuation was much more reasonable then. I admit that investors who stayed on the sidelines based on my previous Hold rating have missed a significant opportunity.
Still, that doesn't mean buyers should turn bullish now and try to add in their attempt to chase further potential upside. I have provided my valuation argument. However, it's also critical to note that momentum "is hard to die." Moreover, with the surge in SMCI and its peers over the past three to four months, it makes sense to remain patient. Furthermore, the price action in SMCI's peers suggests significant caution is warranted. In other words, the price action in SMCI and its peers indicates that the market has likely reflected the considerable growth inflection due to their anticipated substantial underlying revenue and earnings momentum.
Wiwynn stock price chart indicates that earlier dip buyers who bought into its lows late last year have recorded substantial gains. However, subsequent buyers piled into the stock, not the slow and steady accumulation I prefer. It also formed its highs in July, and a bearish reversal could form this month. However, it's still too early to validate the price action as we need to wait until the end of August for more clarity.
Quanta Computer stock long-term chart is even more ominous, with vertical flush-up bars dominating its price action over the past few months. Again, these are not slow and steady accumulation, but buyers who jumped onto the bandwagon, indicating FOMO sentiments and thus requiring caution.
Also, we can assess it topped out in July and could also form a possible reversal this month, pending validation. It suggests that buyers could be losing momentum, leading to profit-taking as early buyers likely aren't going to wait around for selling pressure to intensify, which could hammer their hard-earned profits.
If I can see this, systematic investors or rules-based operators can see it too. They are momentum players. They will likely remain until the momentum swings the other way, which could lead to violent and sharp declines as they rush out.
Why does it matter? Because I think the market assessed SMCI and its peers as a group if we look at their price action and valuation metrics.
Stock | Forward Adjusted EBITDA Multiple | 10Y Average |
SMCI | 16.9x | 7.1x |
QUCCF | 17.4x | 8.5x |
Wiwynn stock | 14.3x | 9.9x |
SMCI and peers' forward valuation multiples. Data source: S&P Cap IQ
As seen above, SMCI trades between its two closest peers, suggesting a broad upward re-rating by market operators to reflect their AI-driven opportunities. However, I assessed that the market likely isn't going to leave SMCI untouched in a downward de-rating to normalize their valuations amid profit-taking. As such, investors must be wary, given the caution indicated by their unsustainable price action and relative overvaluation.
I'm confident in SMCI's long-term uptrend, and I don't expect it to reverse (thus, don't short-sell it, please). However, buyers who missed its monstrous surge and want to buy should remain patient for profit-taking to take place first, improving their risk/reward.
Rating: Maintain Hold. Please note that a Hold rating is equivalent to a Neutral or Market Perform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Super Micro Computer: I Was Wrong, But I'll Wait For It To Burst First