Super Micro Computer: Brace for Impact (NASDAQ:SMCI)

Super Micro Computer, Inc., or Supermicro (NASDAQ: SMCI) is a leading provider of customized solutions in high-performance computing (HPC) and storage systems. Its major customers include Intel (INTC), AMD (AMD), and NVIDIA (NVDA).

Therefore, the company has significant exposure to data center/enterprise/cloud With the growth of computing, home appliances.

The company recently announced a partnership with Arm-based Ampere Computing to expand its solutions for customers with Arm-based cloud workloads. Given the increasing prevalence of Arm-based CPUs in the data center segment, Supermicro has demonstrated the ability to extend his TAM and diversify its reliance on x86 architecture.

Thus, the company has also successfully fended off the macroeconomic headwinds that have affected much of Semipia in 2022. Therefore, SMCI reported his 79% revenue growth in FQ1’23 (the quarter ended September 2022). So, as Supermicro emphasizes, the company significantly outperforms its industry peers.

[Our FQ1 revenue grew] About 10x faster than the current industry average. This proves that our green computing and total IT solutions continue to win the support and trust of our customers. – Supermicro press release

But before investors get over-excited that they may have missed out on a very outperforming stock in 2022 and want to jump in right now, consider the total returns of that year.

SMCI’s one-year total return of 87% easily outperforms peers represented by the iShares Semiconductor ETF (SOXX) and the S&P 500 (SPX) (SPY). Compared to SMCI’s 5-year and 10-year total return CAGRs of 31.2% and 23.3%, it likely incorporates much of the near- and medium-term upside.

There is no doubt that management expects new product launches from AMD, Intel, and Nvidia to provide momentum for future growth.

Nonetheless, worsening macroeconomic headwinds are also cutting corporate IT spending. Meta (META) and Google (GOOGL) (GOOG) also announced an “indefinite suspension” of their data center expansion plans.

Revised DIGITIMES estimates suggest server market shipment growth could slow to 4.3% in 2023 (revised from 5.2% previously) after recording 6.1% expansion in 2022 doing.

DIGITIMES also stressed that China’s recovery is expected to remain sluggish in 2023. However, Supermicro indicated that its China revenue exposure in FQ1 was 3% and therefore not material.Despite this, DIGITIMES claims that “new servers with next-generation CPUs [is] Demand for upgrades is expected to increase from Q2 2023. ”

However, investors should be aware that Supermicro’s growth in the first half of 2023 may be moderate based on the revised outlook provided by management.

Investors should therefore expect a significant normalization of growth from FQ3 (the quarter ending June 2023) before more new upgrades from hyperscalers.

As such, investors should consider whether SMCI’s outperformance could face significant challenges.

SMCI’s most recent NTM EBITDA multiple was 6.7x, below its 10-year average of 7.3x. Therefore, SMCI is not overpriced relative to its historical average.

However, it remains priced slightly above 6x the median of its peers (according to S&P Cap IQ data). As such, we believe SMCI is unlikely to face a sharp decline as valuations have not surged to unreasonable heights. However, it seems to be fairly well balanced and not greatly underestimated.

Nonetheless, investors are advised to be cautious of SMCI’s rapid rise from October lows to November highs.

We didn’t see any signs of a bullish trap suggesting extreme caution, but we think the pullback is likely not over yet, although the consolidation may continue in the short term.

Therefore, investors considering buying can consider deeper retracements to improve reward/risk before adding positions.

Rating: Pending.