AI Server Market Is Expanding Rapidly - Analysts Highlight Super Micro Computer's Importance In The Game

KeyBanc analyst Thomas Blakey initiated coverage on Super Micro Computer Inc SMCI with a Sector Weight rating.

SMCI shares are trading relatively in line with its infrastructure peer group at 27x calendar 2024 P/E vs. peers’ 28x average. The 27x for SMCI compares to 17x for low gross margin peers, but he noted Super Micro’s faster growth warrants near-term premium. 

Super Micro, a leading ODM/OEM of IT infrastructure (compute, storage, networking, liquid cooling), is well positioned to benefit from secular AI growth trends provided its ability to deliver highly customized complete IT solutions leveraging its in-house engineering design expertise based on the latest technology (i.e., GPUs) in the fastest, most efficient manner, Blakey noted.

The opportunity set may extend as AI becomes more pervasive over time, driving the theme of accelerated computing where relative bespoke GPU-based solutions and other and non-x86 (i.e., Arm Holdings Plc ARM) solutions take share in what the CEO of Nvidia Corp NVDA has recently described as a $1 trillion installed base opportunity currently based chiefly on x86 CPUs and ASICs.

Blakey estimates that Super Micro will reach an approximately 23% share of the AI server market in calendar 2024, with competitive moats that should sustain, if not expand, this share in coming years.

The analyst noted that checks indicate other OEMs are making inroads and again highlights this market could expand beyond current forecasts provided AI-driven demands lead to more GPU-based compute supplanting CPUs.

From a pricing perspective, Blakey’s checks indicate demand continues to outpace supply for core GPUs and power, which should keep component prices high for the foreseeable future and drive Super Micro’s model. 

As power becomes more accessible, he noted rack-scale solution configurations could also move higher (i.e., more GPUs), leading to more upward pressure. He said liquid cooling would also add a pricing uplift to rack-scale solutions as Super Micro and others add this vital feature to reduce energy costs in data centers.

From a unit perspective, Super Micro currently can ship 5,000 rack-scale complete IT solutions today per month, and Blakey estimates the company is presently running at ~60% capacity utilization, which compares to 2,000 racks per month in calendar 2022 and the possibility of doubling capacity from current 5k per month by expanding to Malaysia, Mexico, and Texas.

Blakey noted Super Micro’s predominant North American-based manufacturing today is often viewed as a competitive advantage in addition to the company’s engineering and design expertise.

In the most recent quarter, Super Micro grew topline 103% vs. 54% a year ago and posted a gross margin of 15.5% vs. 18.8% and an operating margin of 11.3% vs. 12.8%, respectively. Blakey noted that Super Micro is competitively priced in the market; hence, expect gross margin to remain in the 15% range if not experience modest pressure with the company focusing more on EBIT leverage long-term. 

In the most recent quarter, Super Micro had customer concentration with two customers amounting to 37% and four customers accounting for 67% of accounts receivable, Blakey said. Customers of Super Micro include AI-infrastructure leaders such as CoreWeave, Tesla, Inc. TSLA, Meta Platforms, Inc. META, X, and Nutanix, Inc. NTNX, he added.

Blakey projected third-quarter revenue and EPS of $3.99 billion and $5.83.

Wedbush analyst Matt Bryson reiterated Super Micro Computer with a Neutral and a $530 price target.

Super Micro reports after the close, April 30. Bryson noted the most likely outcome as a modest beat followed by a guide that is at least in line, if not better than prior expectations.

His conversations with the supply chain and other OEMs suggest strong demand for AI servers through the calendar first and second quarters, supported by lifting OEM/ODM component orders.

Bryson noted that GPU shortages appear to have dissipated significantly, limiting the likelihood of supply chain issues disrupting/limiting OEM server sales.

At the same time, his conversations with SMCI competitors throughout the calendar first quarter suggested that the backlog built in 2023 and early 2024 provided visibility to OEM server vendors, at least through the calendar second quarter. 

Bryson projected third-quarter revenue and EPS of $3.90 billion and $5.63.

Price Action: SMCI shares traded lower by 0.84% at $756.00 at the last check Wednesday.

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