2023-10-04 08:30:00 ET
Summary
- Super Micro Computer investors saw the FOMO bubble burst in August as sellers rushed out, taking profits astutely after a surging run in 2023, ensnaring late FOMO buyers in the process.
- The company remains well-primed to leverage the AI server momentum. However, it's critical to assess whether it has been priced in.
- The demand/supply dynamics could improve in 2024 as SMCI's rivals step up their game, leading to more intense competition. As such, execution risks could heighten.
- With SMCI priced well above its historical averages and less constructive price action, investors must not throw caution to the wind.
In my pre-earnings update on Super Micro Computer, Inc. , or Supermicro (SMCI), I urged investors to remain cautious if they missed buying the lows earlier in 2023 before it went on a rampaging surge toward its August 2023 highs at the $357 level.
That level has proved to be a critical resistance zone, likely attracting profit-taking that saw SMCI collapse more than 35% through its post-earnings September lows. As such, I believe it's opportune for me to provide a timely update on whether SMCI's September lows could hold, as buyers attempted to bottom out last month.
Accordingly, SMCI has recovered nearly 30% through its October 2023 highs but found robust selling pressure. I believe Supermicro investors need to assess whether the AI demand drivers have been priced into its valuation, even as the Bulls would likely tell you not yet. Why?
Keen investors should recall that management stressed that Supermicro is confident that its " $10 billion revenue target is achievable in the short term." Accordingly, Supermicro reported revenue of $7.12B for the recently concluded fiscal year 2023 or FY23 (year ended June 2023). It marked a significant YoY increase of 37.1% after last year's 46.1% surge. Compared to its FY21's YoY topline growth rate of 6.5%, it has been a highly remarkable two years for Supermicro.
The company's FY24 revenue guidance range of between $9.5B and $10.5B indicates a midpoint outlook of $10B. Analysts' estimates are more downbeat, projecting FY24 revenue of $9.89B, up 38.8% YoY. However, it still represents significant growth momentum, corroborating analysts' confidence about Supermicro's near-term bullish commentary on AI demand drivers.
Supermicro's leadership, as it was one of the first server technology companies to leverage the AI wave, has benefited its patient investors, who held firmly over the past three years. A well-deserved victory lap for the leading server ODM, as it's capable of offering solutions from Intel ( INTC ), AMD ( AMD ), and, of course, Nvidia ( NVDA ).
Digitimes' industry estimates suggest that AI solutions are expected to dominate server shipments through FY24. Accordingly, Digitimes estimates that the current demand/supply dynamics remain tight, leading to a " substantial shortfall in the supply of high-end AI servers, exceeding 35% of demand in 2023." As such, I believe it should further support the pricing levers of Supermicro's server solutions, underpinning its growth further.
Notwithstanding the pricing lever, the demand/supply dynamics could be less intense from 2024 as its rivals step up their game. Quanta ( QUCCF ) has also experienced " significant orders placed by AI customers." The company is slated to "begin shipping by the end of the third quarter of 2023." As such, I believe the market dynamics are expected to improve further moving ahead, potentially weakening some of the growth bolster that underpinned Supermicro's growth prospects in 2023. In other words, competition is coming, and the question is whether SMCI buyers would support its upside bias further from here. And if so, by how much?
SMCI remains in an uptrend, but there are some yellow flags (caution) to heed.
I noted that since August, SMCI sellers have rejected further buying momentum above the $300 level. While subtle, two bull traps (false upside breakout) likely ensnared momentum buyers anticipating a decisive breakout before more intense selling took over.
With SMCI still close to that critical resistance zone, I urge investors to be cautious. A failure to regain control of that level would likely impede a near-term re-test of SMCI's all-time highs, suggesting that a further downward valuation de-rating is more likely.
SMCI's forward EBITDA multiple of 12x remains well above its 10Y average of 7.6x. Seeking Alpha Quant's "D+" valuation grade corroborates my view that investors should remain patient, allowing the market action to play out and assess accordingly.
Rating: Maintain Hold.
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: Sellers Burst The FOMO Bubble - What To Consider Next