SuperMicro shares drops 6,5% after huge AI rally 📉

Super Micro Computers (SMCI.US) is mainly engaged in building and selling so-called server chips and memory systems for data centers in large companies. As a result, it is benefiting indirectly from the growing demand for AI applications. Since the beginning of the year, its shares have risen by a staggering 188%. The stock lost nearly 10% for a while today, but is wiping out the sell-off in no time.

• What sets the company apart from companies like Nvidia is that instead of manufacturing separate components like graphics cards or RAM, SuperMicro builds complete server racks, ready for sale, and provides related services. Company budgets assume expansion into AI, and with the company's offerings, customers can personalize the systems they want to use;
• Sales of servers for AI (GPU) in Q1 accounted for about 30% of revenue in earnings vs. 20% in Q4 2022. The market reacted euphorically to comments from CFO, Weigand who indicated that thanks to AI, the company is enjoying powerful demand and growing orders for server chips from major customers;
• At the same time, while AI segment monthly revenue growth is impressive, the results themselves were not excellent - but investors chose to put their faith in forecasts for the current quarter. And these came in well above forecasts (range of $2.21 - $2.71 vs. $1.76 Wall Street forecasts).
• While many semiconductor companies point to stockpiling of certain components (a negative factor), SuperMicro has another problem (a positive one) - demand is outstripping the company's capabilities;
• Despite the massive rally, the company's fundamental valuation from the perspective of ratios such as C/Z, C/Wk and PEG still seems attractive - even against the S&P500 average. For example, the C/Z is 24 versus about 200 points for Nvidia
• In Q1 2023, JP Morgan increased its stake in the company by 27% and director Shiu Leung Chan bought 1,000 shares at $133 per share. The market is currently valuing the shares at $240. Rosenblatt analysts gave the company a Buy rating with a target price of $300.

It is worth considering that SuperMicro does not own its own chips but buys them and assembles them in its server chips. It therefore does not have a comparable advantage to Nvidia on the design side, constituting a 'wide moat'. The industry in which it operates is also competitive (Dell or HP - as a main rivals). It is worth mentioning at this point that semiconductors are not only AI.  Some manufacturers point to growing inventories of certain types of chips. As an example, Taiwan Semiconductors (TSM.US), the company warned in April that its stocks were rising - but the market is not worried about this counting on exponential growth in demand for AI chips.

SuperMicro Computers (SMCI.US), H1 interval. In the baseline bearish scenario, at least a test of the SMA100 (black line), which coincides with the 23.6 retracement of the upward wave from January at $223 per share, seems legitimate. Source: xStation5