Where will the super micro computer stock be in a year?

Although Super Micro Computer (SMCI 0.34%) has been one of the market’s top stocks over the past year — up about 123% — the server and storage solutions specialist’s stock has also been prone to volatility. That’s evident from the 37% drop in its share price since early March, with the stock giving up a huge chunk of its earlier gains.

Moreover, Supermicro’s latest results for the fourth quarter of fiscal 2024 (ended June 30) appear to have further dampened investor confidence in the stock due to a huge earnings margin. The company is struggling to grow as it seeks to capture a larger share of the fast-growing artificial intelligence (AI) server market, but the numbers tell us that it is indeed succeeding in its endeavor.

So will Supermicro stock manage to regain investor confidence again and deliver more upside in the coming year? Let’s find out.

The latest guidance suggests more upside

Supermicro ended its last fiscal year with $14.9 billion in revenue, a huge increase from its 2023 revenue of $7.1 billion. The company’s non-GAAP net income also rose to $22.09 per share in the latest fiscal year, from $11.81 per share in the prior year. This tremendous growth in Supermicro’s top and bottom line results was driven by booming demand for its AI servers.

On its most recent earnings conference call, Supermicro management said: “Growth was driven by strong demand for rack-scale, air-cooled, and direct-to-liquid (DLC) AI GPU platforms, accounting for more than 70% of revenue of enterprise and cloud services. supplier markets where demand remains strong.”

The company might have ended the year with stronger growth, but a lack of components for its DLC servers prevented it from reporting higher revenue and earnings growth. Specifically, Supermicro says $800 million worth of shipments were moved in July. However, a look at the bigger picture tells us that Supermicro’s remarkable growth in FY2024 will continue into the new fiscal year.

The company has targeted $28 billion in revenue in the current fiscal year, midway through. The upper end of the guidance range is $30 billion, indicating that Supermicro has the potential to double its revenue once again this fiscal year. The company says it ended the previous quarter with a record backlog. So there’s a good chance it will indeed hit the high end of its forecast range, especially given that it’s slated to bring a new production facility online in Malaysia later in 2024.

Supermicro is also betting big on growing demand for DLC servers, which it claims can help data center operators cut energy costs by up to 40 percent while improving computing performance. Management anticipates that 25% to 30% of new data centers to be deployed globally in the next 12 months will likely opt for DLC servers, with “the majority of deployments coming from Supermicro.”

As a result, Supermicro decided to quickly add more rack capacity for DLC servers, which will hurt its profitability and margins in the short term. But the big picture here is that these short-term growing pains should ideally pave the way for long-term gains, as the share of liquid cooling in data centers over air cooling is expected to grow to 33% in 2028 from 13% past. year, according to the Omdia consultancy.

Moreover, Supermicro’s rapid growth suggests that it is taking a larger share of the AI ​​server market. Bank of America estimates that Supermicro’s share of the AI ​​server market could expand from 10% last year to 17% in 2026. However, other analysts seem to be more optimistic about its prospects. KeyBanc Capital Markets’ Thomas Blakey believes Supermicro’s AI server market share could reach 23% this year.

It won’t be surprising to see Supermicro’s AI server market indeed turn out to be on the higher side. Market research firm TrendForce expects AI server sales to grow 69% this year to $187 billion. The firm expects stronger demand for AI servers to continue into 2025, with Supermicro customers such as Nvidia and Advanced microdevices the release of new generations of data center chips, which could drive the need for more liquid-cooled server solutions.

How much can the stock deliver in the next year?

The above discussion indicates that there is a good chance that Supermicro’s revenue in the new fiscal year, which has just begun, will be near the upper end of its guidance range. Assuming Supermicro does indeed hit $30 billion in revenue in fiscal 2025 and trades in line with the company’s 2.8 price-to-sales ratio. S&P 500 (of which it is a part), its market cap could rise to $84 billion within a year.

That would be a big jump from its current market cap of $33 billion. What’s worth noting here is that Supermicro is currently trading at twice sales, which is lower than the S&P 500 average. Assuming the stock continues to trade at this multiple after a year and manages to generate annual revenue of At $26 billion — the lower end of the revenue guidance range — its market cap could be worth $52 billion.

That would be a 57% increase in its market cap from current levels. So investors looking to add a growth stock that’s trading at an attractive valuation to their portfolios can consider buying Supermicro while it’s down and remains cheap. It could regain its momentum and deliver solid earnings in the coming year.