Considering SMCI for Your Portfolio? Key to Watch Before Investing

AI chip leader Nvidia has surged over 170% in 2024, far ahead of other companies in the S&P 500 index. However, it is not the highest-performing stock this year.

The best-performing stock is another AI stock closely related to Nvidia – Super Micro Computer(SMCI). As of June 18, SMCI has risen over 220% this year, leading the S&P 500 component stocks.

However, after hitting records in early March, SMCI’s stock dropped roughly 20% by June 18.

If you are thinking of investing in this company, what are the key points you should understand?

SMCI’s servers & the AI industry chain

If you’re interested in SMCI but don’t know much about the company, a simple description is that SMCI and Nvidia are complementary businesses.

Nvidia makes a type of computer chip called a GPU that was first used to make video games look better. However, now, these chips are the backbone of AI, helping computers learn and think. Companies then mass-order these chips to improve their products or services’ AI capabilities.

Where SMCI comes into play in this process, is their servers. The chips are put into servers, which are basically advanced computer boxes, and are the foundations of AI in technology.

As a key supplier in the data center market, SMCI experiences rapid growth and increased volatility due to the surge in AI demand. While SMCI holds a smaller server market share than Dell Technologies and Hewlett Packard Enterprise, its focus on high-performance, liquid-cooled servers for complex tasks has earned it a partnership with Nvidia.

SMCI’s AI server sales now account for over 50% of its income, a figure expected to rise. Bank of America estimates that with a 150% expansion of the total market size, SMCI’s stake in the dedicated AI server market is expected to increase from 10% to 17% within the next three years.

However, SMCI’s market stance isn’t as strong as Nvidia’s. As Dell and HPE introduce AI servers that compete with SMCI’s offerings, the company could face challenges with competitive pricing and stringent comparisons in the future. Nonetheless, there remains significant potential for growth as SMCI continues its journey toward full market maturity.

Different companies in the AI industry chain

Valuation

After releasing its latest earnings report, SMCI fell by over 14% on May 1. In the 12 months prior to the report, SMCI had surged more than 770%, prompting the market to hold higher expectations for its financial performance.

Using the earnings from the last 12 months as a reference, the current P/E ratio of SMCI stock stands at 51. This is higher than the company’s average P/E ratio of around 21 observed over the last five years. The current P/E ratio, which is positioned in the 95th percentile relative to the historical average, may indicate that the market is optimistic about the company’s potential for increased future earnings growth.

Looking to the future, the forecast average EPS for the upcoming year is projected to be $34 according to Bloomberg. Based on the present share price, this results in an estimated forward P/E ratio of approximately 27, which is higher than the historical average.

• Tips: To get more information about SMCI, please check “Company Valuation” on moomoo app.
  • Search “SMCI” on moomoo app – Click “Company” button above the price chart – Scroll down and find “Company Valuation”.
  • Current P/E ratio = Current stock price / EPS (past 12 months)

Analyst opinions

For SMCI, some analysts have also shared their ratings and target prices.

The most recent rating was issued on June 6 by Barclays, which maintained a positive outlook on SMCI stock. Barclays assigns a ‘buy’ rating to the company and forecasts that SMCI’s stock price is likely to surge to the $1,000 level within the upcoming year.

Likewise, Northland Securities has sustained its positive perspective, keeping its ‘buy’ rating and proposing a price target of $1,300 on June 5.

In contrast, Wells Fargo appeared less optimistic, reiterating its prior position on SMCI shares as a ‘Hold’ on June 3, while maintaining the target price at $890.

Option sentiment on SMCI

Options open interest (OI) is the total number of active contracts held by market participants. Analyzing the open interest PCR (Put-Call Ratio) helps assess market sentiment.

• PCR = Put open interest / Call open interest
• A put-call ratio above 0.7 signals bearish sentiment with more puts bought; below 0.7, trending toward 0.5, indicates bullish activity with a preference for calls.