Meet the Newest Stock-Split Stock in the S&P 500. It’s up 500% over the past year, and Wall Street says it’s still a buy right now.

The S&P 500 (^GSPC 0.47%) is the most watched benchmark in the US and consists of the 500 largest companies in the country. Given its large membership, it is considered by many to be the most reliable indicator of overall stock market performance.

To be included in the S&P 500, a company must meet certain criteria:

• Be based in the US
• Have a market capitalization of at least $8.2 billion
• At least 50% of its outstanding shares must be available for trading
• It must be profitable under generally accepted accounting principles in its most recent quarter
• In total, it must be profitable for the last four quarters

Super Micro Computer (SMCI -0.23%)also known as Supermicro, is one of the most recent additions to the S&P 500, joining the fold in March and one of eight companies added to the index so far this year.

Moreover, the AI-centric server maker recently announced a 10-for-1 stock split, generally the province of companies with years of strong operating and financial results. Since the start of 2023, Supermicro’s stock is up 500% as rapid adoption of generative AI has supercharged its sales and boosted its profits.

Despite its skyrocketing earnings, many on Wall Street believe there is more upside ahead. Let’s look at what sets Supermicro apart and whether it’s a buy.

Image source: Getty Images.

Catapulted to stardom

Supermicro has been creating custom server solutions for about three decades, but that expertise had customers clamoring for its services when generative AI emerged early last year. The company offers a variety of servers and storage systems, from plug-and-play rack scale systems to modular building block components.

The company also provides support services to help customers “install, upgrade and maintain their computing infrastructure,” according to a regulatory filing.

Management also cites strong partnerships with all major chipmakers as a competitive advantage, keeping Supermicro supplied with the latest and greatest processors. Additionally, the company’s focus on energy efficiency has become a hot ticket during the AI ​​boom.

Last year was transformative for Supermicro. During fiscal 2024 (ended June 30), revenue of $14.9 billion was up 109% year-over-year, while earnings per share (EPS) of $20.09 were up 76% . Management notes that sales have grown five times faster than the industry average over the past 12 months, showing that the company is gaining market share from its rivals.

That said, this unprecedented growth has not been without its challenges. In the most recent quarter, the company experienced significant pressure on its margins, which it attributed to a shift in its product mix and a shortage of certain server components, which pushed $800 million in sales into the next quarter .

Chief Financial Officer David Weigand addressed the issue, saying, “We have a path to improve gross margins to our target range of 14% to 17% as we introduce innovative platforms based on several new technologies from our strategic partners and improved efficiencies from production on our basis. DLC (direct liquid cooling) solutions. It’s clear that management sees this as a short-term problem.

The company has also struggled to keep up with demand by expanding its existing production capacity while bringing in new facilities. These steps will give Supermicro the ability to achieve sales of $50 billion in the coming years, up from $15 billion this year.

If the company can overcome its growing pains, there’s a good chance the stock will resume its upward trajectory.

Analysts are still bullish on Supermicro

Wall Street rarely agrees on anything, so it’s worth noting that most analysts covering the stock think there’s still significant upside ahead. Of the 17 analysts who covered the stock in July, 12 maintain a buy or strong-buy rating and none recommend a sell. An average price target of around $1,000 suggests they believe the stock could more than double from Wednesday’s closing price.

However, Loop Capital analyst Ananda Baruah is equal More bullish than its Wall Street peers, assigning a buy rating and a $1,500 price target. This suggests potential gains for investors of 204% from Wednesday’s closing price.

The analyst cites Supermicro’s leadership “in both complexity and scale.” Baruah went on to say that the company could more than double its revenue rate to $40 billion in the next two years.

Despite the stock’s meteoric rise since the start of last year, it’s still attractively priced, selling for about twice sales, the very definition of a reasonably priced stock.

For investors with an appetite for some additional risk and a stomach for volatility, Supermicro looks poised to lead the AI ​​revolution to new heights that could enrich shareholders along the way.