Super Micro Computer Joins S&P 500 Index: An 'AI Winner At Premium Valuation,' Analyst Says

Super Micro Computer, Inc. SMCI, a leading manufacturer of artificial intelligence (AI) servers, is joining the S&P 500 Index on March 18, alongside Deckers Outdoor Corp. DECK., a California-based footwear designer and distributor.

These new additions will replace Whirlpool Corporation WHR and Zions Bancorporation N.A. ZIONS.

Concurrently, Goldman Sachs initiated coverage of Super Micro Computer Inc., setting the stage with a Neutral rating and a 12-month target price of $941, implying a very stretched upside potential from current levels.

Analyst Michael Ng, CFA, highlighted in a Monday note that SMCI, known for its high-performance server and storage systems, has evolved into a significant player in AI infrastructure, thanks in part to its partnerships with industry giants like Nvidia Corp. AMD, Advanced Micro Devices Inc. AMD, and Intel Corp. INTC.

However, while the company is considered at the forefront of the AI infrastructure boom, Goldman Sachs’ bullish outlook is tempered by considerations of competitive pressures and valuation metrics.

AI Demand Surges Ahead

Michael Ng pointed out the budding nature of the AI market and suggested that the demand for AI compute systems might surpass current estimates.

As SMCI ramps up its production capacity in anticipation of this burgeoning demand, the company is well positioned to see improved margins and a broader market reach.

SMCI Outperformed NVIDIA

SMCI’s shares have seen a near 1,000% surge in the past 14 months, doubling the gains of Nvidia Corp. While in 2023, SMCI’s stock closely mirrored NVDA’s performance, the first two months of 2024 have seen SMCI pull ahead significantly, boasting a 205% increase compared to NVDA’s 60%.

Balanced Risk/Reward Perspective

Goldman Sachs appreciates SMCI’s pivotal role in the AI-driven market but also acknowledges that the stock’s current valuation levels are considered as fair.

“The risk/reward for SMCI is balanced. We expect that those who are more cautious will have a more muted view on SMCI's ability maintain or grow market share & the durability of its customer base,” Michael NG wrote.

Instead, those with a more positive outlook may view SMCI as an essential supplier of infrastructure for the ongoing AI competition, strategically positioned to increase its market presence through enhanced production capabilities and unique design strengths.

Goldman Sachs projects SMCI’s revenue to rise at an average 38% annual pace over the next five years against an industry growth rate of 11%.

Goldman’s target price of $941 is based on a 29x forward earnings, aligning with the average P/E multiple of SMCI's peers.

Risks Ahead

According to the investment bank, challenges may arise as SMCI ventures into enterprise AI infrastructure, facing competition from established IT hardware suppliers like DELL Technologies Inc. DELL and Cisco Systems Inc. (NASDAQ: CSCO.

Another significant risk stems from the fact that a substantial portion of SMCI’s revenue is dependent on its two largest customers, with the primary customer contributing to approximately 26% of the total revenue. This concentration introduces a vulnerability should there be any changes in buying behaviors.

Moreover, while the company’s expansion into Malaysia seeks to leverage lower labor costs, this strategy may also lead to a squeeze on profit margins.

Market Reaction

During premarket trading on Monday, shares of SMCI saw a remarkable 16% increase, positioning them to surge beyond the $1,000 mark.

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