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Super Micro Computer (NASDAQ:NASDAQ:SMCI) has been on a tear lately, with its share price soaring from approximately $38.00 per share on July 5, 2022, to a 52-week high of $74.38 on August 25, 2022. Since then it has pulled back to a little over $67 per share as I write.
With its share price jumping over $36.00 per share in under two months, the obvious question is whether or not the company is fully valued, or if it still has room to run.
In this article, I’ll show why I believe the company has a lot of upside left to go, even in the near term, and why it looks good in the long term as well.
Some recent numbers from Super Micro Computer
Super Micro Computer’s revenue in fiscal Q4 came in at $1.64 billion, up 53 percent year-over-year, while beating estimates by $40 million. Non-GAAP EPS jumped to $2.62, beating estimates by $0.27.
Gross margin in the reporting period was 17.6 percent, up from the 13.6 percent last year in the same reporting period. The major reason given for the improvement was the adjustment the company made to rising freight and component costs. Afterwards, the cost of freight dropped by about 20 percent, effectively increasing gross margin. In other words, it appears the company passed on freight and component costs to its customers in the quarter, and during that time the cost of freight fell, bringing about wider margin in the quarter.
Management said gross margins in the next quarter should be close to what they were in Q4. That suggests the company is going to retain its increase in prices to cover freight and components.
At the end of the quarter, SMCI held $267 million in cash, with a debt load of $597 million.
As for guidance, the company expects to continue to spend heavily, looking at a range of $6 billion to $8 billion in CapEx for the first fiscal quarter of 2023.
At this time, I’m not too concerned about the spending because the company is leveraging it well as it continue to increase revenue and earnings. But if things start to slow down, this could put some significant downward pressure on the company’s performance and share price. Free cash flow is of particular concern.
I don’t think the company has a choice here because of the competitive market it competes in; it must continue to spend on R&D in order to maintain an edge against its competitors.
Over the long haul, it should pay off handsomely for SMCI. It has allowed it to design a Universal GPU system that basically allows GPUs to communicate or talk to one another. This largely cuts back on the likelihood of interlink traffic jams.
Another major feature of the platform was designed for the purpose of making room for development of future technologies. At this time, it’s definitely a moat the company enjoys against its competitors, and why it continues to spend at such high levels.
The good news is, at this time, the company produces results from these expenditures, and as long as it continues to do so, the company should do okay, even if there are temporary headwinds it has to fight through.
For full-year 2023, ending June 30, 2023, the company guides for revenue in a range of $6.2 billion to $7 billion. The company raised the floor on its previous guidance by about $200 million.
Diluted net income on a GAAP basis is projected to be a minimum of $7.27, and non-GAAP diluted net income per share at $7.50.
As for manufacturing scale and capacity, the company has the means to generate revenue in a range of $10 billion to $12 billion. SMCI is working on building out that capacity in light of expected future demand for its products and services. Its long-term goal is to build out future capacity to generate up to $20 billion in revenue.
Geographic exposure
I think the geographic exposure in sales is a strong positive for the company in the current economic climate. Revenues in the U.S. accounted for 66 percent of sales, followed by 17 percent in Asia, 14 percent in Europe, and 20 percent in the rest of the world combined.
The major reason U.S. sales was so important is because it was up 65 percent as a result of increasing market share with its “advanced Rack-scale total IT solutions for emerging high growth server workloads.” Asian sales were up 38 percent, European sales jumped 21 percent, and the rest of the world climbed by 8 percent in relationship to Rack-scale sales. Sequentially, U.S. revenue soared 41 percent, Europe was up 9 percent, Asia was down 9 percent, and the rest of the world increased 30 percent. Without the solid performance in the U.S. market, the performance of SMCI would be much weaker. That’s significant because, even with recessionary forces, the U.S. market remains fairly strong, and in the sector SMCI competes in, this should provide continued growth in the future, even if in the short term there may be some temporary headwinds.
With rack sales in high demand and accounting for a lot of SMCI’s momentum, the company says that, as of September, it has doubled its rack-scale capacity, now having “up to 6000 direct for [the] quarter now.”
The point there is the company’s geographic exposure to the U.S. market should provide ongoing growth in the rack segment.
A few risks to consider
While the performance of SMCI has been solid, and its guidance strong, there are a couple of things to take into consideration on the risk side in order to get a better overall view of the company.
The first risk is the rapid increase in its share price from $38.00 per share on July 5, 2022, to a 52-week high of $74.38 on August 25, 2022, as mentioned earlier. I think it has yet to be determined how much future growth is already priced in, and what the near-term outlook for its share price is.
This is especially true with challenges related to its supply chain, which could have some impact on the short-term performance of the company. I tend to think this is only a temporary situation, but management mentioned it and so should be taken into consideration when thinking in terms of its short-term performance and the possibility of a better entry point if it is shown to have an impact on the top line.
Management said growth could slow down in the current quarter because of supply constraints and September being a typically slow month for doing business. Again, I see this as a temporary blip, and if this is how it plays out, could result in slightly weaker results in the next earnings report, which could provide a better entry point.
With Price/Sales (TTM) of 0.66, and Price/Sales (FWD) of 0.54, any pullback should be considered an excellent buying opportunity. Of course, that could be said of the company share price where it stands today as well.
Free cash flow is also weighing on the minds of some investors that are hesitant to take a position because its -$486 million (TTM) as of the end of June 2022. Any hiccup for the company could magnify this in the eyes of shareholders, which could cause them to sell off shares, especially in order to lock in profits if it’s perceived there could be a possible prolonged period of consolidation.
Last, if there is a recession of any length and the economic outlook further weakens, companies, as typical of that scenario, tend to cut back on expenditures, which would cut into the top and bottom lines of SMCI.
Conclusion
The bottom line to me concerning SMCI is that it may have to weather a short-term period of volatility before resuming its upward growth trajectory. Management, even with its solid guidance, said in the current quarter there may a supply chain issues that could impact the company’s performance.
Further out, Super Micro Computer has built out a platform that gives it a good chance of continuing to gain market share as future technologies are able to operate on a universally prepared platform.
There are risks associated with its significant amount of spending, but those risks, in my opinion, are associated with temporal headwinds, rather than issues surrounding the business model and products and services the company offers.
In regard to its investing strategy, I would suggest going with dollar-cost averaging in the near term because of immediate uncertainty as a result of supply chain bottlenecks that will eventually work themselves out.
Looking ahead, even with the current quarter representing a potential slowdown in growth, there is no doubt in my mind by the end of the year the share price of SCMI will be higher than its current 52-week high, based upon company guidance and market demand.
Long term, I can’t see at this time how this isn’t going to continue to be a strong growth company catering to companies’ needs in the technology sector that are in the early stages of development, such as AI, IoT, and various other sectors that have a long runway of growth ahead of them. SCMI is positioned well to ride that growth, even as it goes through the occasional period of contraction. I don’t see the company repeating the upward movement in its share price as it has done recently, but it should continue to grow at a healthy pace in the industry sector and segments it competes in.
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