Stock of the week - Super Micro Computer (07.03.2024)

• Super Micro Computer surges on S&P 500 inclusion
• Stock rallies to a fresh record high
• Shares gained over 1200% since start of 2023
• AI-demand fuels significant sales and earnings growth
• A look at valuation
• Advance slowed near $1,150 mark

Super Micro Computer (SMCI.US) rallied at the start of this week and reached fresh all-time highs. The move higher was triggered by S&P Dow Jones Indices announcement made last Friday after close of the Wall Street session. Let's take a quick look at the stock as well as its valuation!

Super Micro Computer to join S&P 500 index

Super Micro Computer rallied almost 20% on Monday and climbed to fresh all-time highs. The move higher was triggered by an announcement made by S&P Dow Jones Indices on Friday after the close of the Wall Street session. S&P Dow Jones Indices announced that Super Micro Computer and Deckers Outdoor will replace Whirlpool and Zions Bancorp in the S&P 500 index, effective on March 18, 2024.

Stock being included in the index of 500 largest US public companies hints that demand for its share may jump in the near-term. This is because index funds, like ETFs, tracking S&P 500 index will have to adjust their portfolios to match new composition of the index. This means they will have to purchase shares of Super Micro Computer and they will have to do it around March 18, 2024 to ensure the lowest possible mismatch between index performance and fund performance. A post-announcement jump in Super Micro Computer shares is an attempt to front-run demand from ETFs.

Stock rallied over 1,200% since the beginning of 2023!

Nvidia has been a star of the ongoing AI-driven stock market rally, climbing around 500% since the beginning of 2023 and becoming the third-largest public company in the world. Attention on Nvidia should not come as surprise, given that it is a large company and the AI-fuelled returns have been gargantuan. However, it is not the best performing AI-related company. Super Micro Computer, which manufacturers servers and other equipment for artificial intelligence, surged a stunning over-1200% since the beginning of the previous year! Stock is also trading around 295% higher compared to close of 2023!

Source: Bloomberg Finance LP, XTB Research

Demand for AI drives SMCI results

While even vague mentions of being involved in AI technology in one way or another triggered share price jumps on many stocks over the past year, AI impact on Super Micro Computer's business is not vague and massive share price rally seems to be, at least to some extent,  justified with fundamentals.

Company reported fiscal-Q2 2024 results (calendar Q4 2023) at the end of January 2024, which turned out to be very strong. Fiscal-Q2 sales increased over 100% YoY to $3.66 billion, with gross profit jumping 67% YoY to $564.32 million. Operating income surged 72% YoY, while net income was 68% YoY higher. Such solid performance was not a one-off event with company expecting fiscal-Q3 2024 sales to reach $3.7-4.1 billion, up from $1.28 billion in fiscal-Q3 2023. When it comes to full-year fiscal-2024 forecast (July 2023 - June 2024), Super Micro Computer expects sales of $14.3-14.7 billion, or around 100% higher than in fiscal-2023. Note that full-year guidance was boosted significantly, compared to previous forecast of $10-11 billion in sales, as strong AI-demand becomes more and more clear.

Financial dashboard for Super Micro Computer. Source: xStation5

A look at valuation

Let's take a quick look at Super Micro Computer's valuation with two often used valuation methods - DCF and multiples. As Super Micro Computer is not a dividend paying stock, it cannot be valued with Gordon Growth Model, which we often use in our Stock of the week analysis. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow (DCF) method

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. While we usually base those assumptions around 5-year averages in Stock of the week analysis, such an approach would not work for Super Micro Computer. The company is experiencing massive improvement in business prospects thanks to AI revolution, and basing revenue growth or operating margin assumptions on 5-year averages would significantly undervalue the company's stock.

Having said that, we have assumed a 20% revenue growth and an 11% operating margin, while assumptions for tax rate, capital expenditures, depreciation, working capital and WACC were based on most recent periods. Given that Super Micro Computer is projecting a 100% revenue growth this fiscal year, those assumptions can be seen as conservative, but such a strong growth is unlikely to last beyond the initial AI boom. Nevertheless, as there is a high degree of uncertainty over future pace of revenue growth, we have decided to make detailed forecasts for just 5 years, instead of 10 years as we usually do. Terminal revenue growth is assumed at 6% while terminal WACC is assumed at 9.5%.

Such a set of assumptions provides us with an intrinsic value of Super Micro Computer's shares of $949.12 - or around 15% below yesterday's cash close. Terminal value forecast accounts for almost 90% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions, and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples valuation

Next, let's take a look at how Super Micro Computer's valuation compares with peers. We have constructed a peer group consisting of 6 US-listed companies considered to be competitors to Super Micro Computer - Cisco Systems, Dell Technologies, HP Inc, Hewlett Packard Enterprise, NetApp and Seagate Technology Holdings. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that there is some volatility in multiples for Super Micro Computer peers. However, the first key takeaway from the table is that Super Micro Computer trades at much higher multiples than its peers. The second key takeaway is that regardless of the multiple we use and whether we look on means or medians, the company looks to be overvalued compared to its peers. We are providing valuation calculated using both mean and median in the table below. Using median multiples provides us with valuations ranging from $169.57 in case of EV/EBITDA multiple to $703.41 in case of P/BV multiple. A P/FCF multiple for Super Micro Computer cannot be calculated, as the company had a negative free-cash flow in the most recent 4 quarters combined. A trimmed mean (excluding the highest and lowest valuations) provides us with an intrinsic value of $310.97 per share, or around 70% below yesterday's cash closing price.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

Super Micro Computer (SMCI.US) surged above $1,000 on Monday and reached fresh all-time highs. However, taking a look at the chart at H1 interval, we can see that the advance was halted in the $1,150 area. Stock dropped on Tuesday amid a broad market sell-off, but has managed to recover back to the $1,150 area yesterday. Future technical outlook will depend on what the stock does next. A failure to break above $1,150 area and a pullback would result in double top pattern surfacing on the chart. In such a scenario, the $1,000 area would serve as the neckline of the pattern and will be a key near-term level to watch.

Source: xStation5