The stock price of ultra-microcomputers has plummeted and experienced a sharp sell-off. Is this an opportunity for investors to buy on dips?

The shares of Super Micro Computer (Super Micro Computer) sold off after reaching $1,000 per share, but fundamental analysis showed that this sell-off was unreasonable.

Demand for SMCI's products is expected to remain strong due to major technology companies investing heavily in artificial intelligence infrastructure.

SMCI's guidance forecast for the next quarter and the full fiscal year shows that the company's revenue growth and profitability will expand significantly.

The discounted cash flow (DCF) analysis compiled by Xiaobian shows that SMCI's stock is undervalued by more than 70%.

This year, ultra-microcomputer stocks once surpassed $1,000 per share, but this price became a strong resistance level, and the stock price failed to maintain this psychological price. The past rise in stock prices stemmed from various factors such as strong industry growth, SMCI's outstanding performance in the industry, and strategic cooperation with leading semiconductor companies. However, although these bullish factors were further strengthened in the third quarter of FY2024, the stock price fell further after the release of the latest earnings report due to investor uncertainty about the sustainability of AI-driven growth. Investors began to make a profit settlement, and the stock was under further selling pressure.

However, as an investor who only relies on fundamentals, I tend to ignore non-fundamental factors in stock price fluctuations. Through analysis, Xiaobian found that the stock still has a major advantage, and the updated valuation analysis shows that the stock is still very attractive and worthy of investors' attention. If investors have investment intentions, they can choose a relatively trustworthy brokerage firm to invest. For example, Schwab Wealth Management is a world-renowned investment brokerage firm. If they open an account, they can obtain a bank account with the same name. They can deposit digital currency (USDT) to the multi-asset wallet BiyaPay, and then withdraw fiat money to Jiaxin Securities to invest in US stocks. Of course, investors can also first search for the SMCI stock code on the platform, regularly monitor stock prices according to their own investment strategies, and choose the right time to buy stocks.

Next, Xiaobian will take you to see how this conclusion was reached through specific analysis.

After the financial report for the third fiscal quarter was released, many analysts have already detailed the report from different perspectives. Here, Xiaobian would like to highlight that with SMCI's revenue tripling year over year and adjusted earnings per share more than tripling, this trend is very strong. Strong earnings per share were driven by improved non-GAAP operating margins, which increased this indicator from 8.7% to 11.3%.

According to the management discussion section of Ultramicrocomputer's latest 10-Q report, revenue growth was driven by increased customer demand for rack scale solutions for GPU servers, high performance computing (HPC), and more complex systems.

As a result, the increase in average selling price (ASP) also had a positive impact on revenue growth. According to Xiaobian, there is also a third important dimension in revenue dynamics, which is the breakdown between regions.

Revenue growth in all geographic regions in the fiscal third quarter was astonishing, indicating that the AI revolution is a global phenomenon. This indicates that revenue growth is likely to continue for a longer period of time. All of the world's strongest economies are determined to stay ahead in the AI race, which could drive demand for SMCI solutions for a long time.

Due to advances in generative AI technology, SMCI's advanced applications require optimized rack-scale solutions, and demand is surging. According to a recent report, this demand is expected to remain high for a long time as several large companies recently announced multi-billion dollar investments in data centers using artificial intelligence technology.

Recent news suggests that Amazon (AMZN) plans to invest $150 billion in data centers over the next 15 years, which means it will invest an average of $10 billion a year in AI infrastructure.

According to Reuters, the second-largest project planned by Microsoft (MSFT) and OpenAI will reach an astonishing $100 billion in funding. Google (GOOGL) is expected to invest up to $9.5 billion in US data centers in 2024 alone.

Therefore, Xiaobian expects SMCI's product demand to remain strong. Of course, SMCI isn't the only company in this space, and competitors will definitely try to take their place in these projects. However, in recent years, SMCI has a good record of outperforming the industry's growth rate, which has strengthened Xiaobian's confidence that the company will be able to effectively absorb large data center expenses from tech giants.

Ultramicrocomputer maintains deep collaboration with Nvidia to integrate the most powerful AI chips into its server solutions. This includes the latest news about the partnership with Nvidia's GH200 Grace Hopper superchip, and SMCI is expected to be an early market entrant.

Additionally, SMCI has announced a next-generation AI solution incorporating the latest Nvidia GB200 Blackwell Superchip. In addition to customizing servers based on Nvidia's products, SMCI also works closely with other HPC leaders such as the AMD Mi300x and Intel Gaudi AI accelerators.

As a result, SMIC's performance outlook for the next quarter and fiscal year 2024 is very strong. Management's median revenue guidance for the fourth quarter was $5.3 billion, which would mean a 143% year-over-year increase. The median adjusted earnings per share (EPS) guidance for the fourth quarter was $8.02, indicating an increase of 128% year over year and 20% month over month. For the entire 2024 fiscal year, management expects revenue to reach $14.9 billion, which is the median value of the scope of delivery and represents a 109% year-on-year increase.

For fiscal year 2025, the consensus expects revenue growth of 58% and adjusted EPS growth of 42%. This means that SMCI is likely to maintain its impressive revenue growth and profitability expansion trajectory, which is a strong bullish sign.

As Xiaobian mentioned, this optimistic estimate seems reasonable, as the biggest tech companies continue to invest billions of dollars in artificial intelligence infrastructure. Xiaobian's optimism was also supported by J.P. Morgan Chase (JPM) analysts.

They forecast SMCI's compound annual revenue growth rate of 43% between 2023 and 2027, and the company's share of the AI server market is expected to reach 15%.

As discussed above, there are a number of strong bullish signs supporting optimism. SMCI operates in a very popular market, and it works with all of the biggest semiconductor vendors, particularly Nvidia, which has an impressive 80% market share in the GPU space. Demand for data centers and high-performance chipsets will remain strong given that all tech giants are investing heavily in data centers around the world.

SMCI has cleverly capitalized on these favorable trends, as evidenced by the extraordinary speed of its earnings per share expansion. Xiaobian believes that this series of positive catalysts is an unstoppable force, which makes Xiaobian very optimistic about SMCI.

It may seem difficult to call a stock “cheap” that has increased in value by 500% over the past year, but Xiaobian's Discounted Cash Flow Analysis (DCF) shows that the stock still has solid upside potential. According to Xiaobian's recent DCF analysis, after the recent pullback, the stock was undervalued by 73%.

When calculating upward potential, Xiaobian constructed a DCF model based on 8.8% weighted average cost of capital (WACC). For fiscal year 2024 and fiscal year 2025, Xiaobian is based on Wall Street revenue forecasts provided by Seeking Alpha. Forecasting longer-term revenue is always complicated, but as the scale increases, revenue growth of more than 50% is likely to be unsustainable.

As a result, Xiaobian estimates that revenue will decelerate sharply after 2025. Considering the importance of SMCI in the current transformation of the artificial intelligence (AI) industry, Xiaobian reiterated a constant growth rate of 5% when calculating the final value ('TV'). Some might argue that using a constant 5% growth rate is too optimistic because this ratio is far above the US long-term inflation average. However, I agree with Nvidia CEO Jensen Huang, who called the current AI situation the “iPhone moment.” As shown below, since the iPhone was first released in 2007, Apple (AAPL) has shown a 21% compound annual growth rate (CAGR) in revenue.

In this case, a constant 5% growth rate seems reasonable.

The company invests heavily in expanding production to meet demand, so I expect a very low free cash flow ('FCF') margin of only 2% in 2024. However, trends indicate that SMCI has historically been quite successful in converting accounting profits into free cash flow. Therefore, I expect that with strong revenue growth, this indicator will rapidly expand by 200 basis points per year. According to data from Seeking Alpha, SMCI currently has a total of 58.6 million shares in circulation.

Xiaobian's new target price is 1,385 US dollars, which is a significant increase compared to the fair value of 1,058 US dollars obtained previously. The increase in stock prices was mainly due to J.P. Morgan Chase's outlook for long-term revenue growth after announcing their expected 43% compound annual growth rate (CAGR) for the industry between 2024 and 2027. I would like to emphasize here that Xiaobian is very conservative in discounted cash flow (DCF), using a CAGR of 33% between 2024 and 2027.

To verify DCF's results, you can check how SMCI's valuation ratio compares to other semiconductor stocks. Although these companies are not direct competitors to SMCI, AMD (AMD) and Nvidia (NVDA) are also seen as major artificial intelligence beneficiaries, and these stocks have also shown a strong rebound since early 2023. As shown in the table below, SMCI is equal to almost all valuation ratios of NVDA and AMD. Furthermore, I would like to emphasize that AMD's TTM and FWD revenue growth is still far from SMCI. Therefore, valuation ratio analysis also shows that SMCI is undervalued.

SMCI is showing unstoppable revenue growth, and its profitability is expanding at an extremely rapid pace. Given that tech giants continue to increase their investment in data centers and the company's close cooperation with Nvidia, which is leading the semiconductor artificial intelligence revolution, I am very optimistic about the company's potential for further growth. As such, SMCI is a “strong buy” option, particularly at a price level that currently offers 73% upside potential.

Finally, Xiaobian reminds everyone that investing is risky. I hope all investors will consider it carefully. I wish everyone a good return on investment!

Source: Seeking Alpha

Edited by BiyaPay Finance