If you invested $1,000 on Super Micro Computer (SMCI -5.25%) five years ago, you would have $37,000 today -- an eyewatering return of 3,700%. Companies like this demonstrate the potentially life-changing impacts of long-term investing.
But past performance doesn't necessarily guarantee future results. Let's dig deeper to find out if Super Micro can continue to deliver market-beating growth over the next half-decade.
Why Super Micro Computer?
Founded in 1993, Silicon Valley-based Super Micro Computer is a technology company specializing in energy-efficient computer servers and data-center equipment. It isn't the flashiest company. But as a picks-and-shovels provider for other enterprises, it has enjoyed significant spillover benefits from technology megatrends like cloud computing and 5G connectivity, which increase demand for its hardware.
The launch of OpenAI's ChatGPT in late 2022 and the subsequent generative artificial intelligence (AI) boom were Super Micro's big break. Part of Super Micro's business involves turning Nvidia's graphics processing units (GPUs) into ready-to-use computer servers for clients, so the rising demand for Nvidia hardware also boosted its business. These positive trends have continued in the third quarter.
Super Micro's revenue jumped around 200% year over year to $3.85 billion, while net income skyrocketed from $86 million to $402 million, based largely on AI-related demand.
Analysts are confident that the AI industry momentum will continue in the near term, with Barclays expecting national AI projects in East Asia and the Middle East to provide additional demand for data-center hardware. Super Micro is also diversifying its supply chain by building servers using GPUs developed by Nvidia's rival Advanced Micro Devices, thereby reducing its overreliance on one chipmaker.
The company is not without challenges
Super Micro's future looks bright from an operational standpoint. But the company isn't without risks. Enterprise clients have already poured billions into generative AI hardware, and it is unclear how much more they can afford to spend before shareholders push back.
According to The Washington Post, AI chatbots like ChatGPT lose money on every query because of their extremely high running and training costs. And the growing popularity of free, open-source large language models (LLMs) like Elon Musk's Grok or Meta's LLaMA could undermine the industry's profit potential by introducing more competition.
Image source: Getty Images.
Right now, most of the money in AI is being made by selling enabling hardware rather than by developing consumer-facing software. This is a classic California Gold Rush scenario where the sellers of picks and shovels outperformed the actual gold miners. But if the gold miners pack up and go home, the equipment providers will lose their customers.
Super Micro faces an additional threat from competition in the server market. While the company benefits from rising demand for AI chips, it doesn't design or manufacture the chips itself. This means its economic moat is somewhat weak. And it will face competition from other server makers like Dell Technologies or Hewlett Packard Enterprise, which are also using Nvidia chips to develop servers for AI-related workloads.
Is Super Micro stock a buy?
While it is uncomfortable to buy a stock that has already risen so far so fast, Super Micro still looks like a decent investment. Granted, the company faces a somewhat shallow economic moat and the undeniable risk of the AI industry not meeting expectations. But with a forward price-to-earnings (P/E) multiple of just 22, the market seems to have already priced-in most of the potential downside.
While Super Micro stock probably won't rise by another 3,900% over the next five years, a healthy operational-growth rate coupled with a reasonable valuation makes it look likely to outperform the market.
