Can Super Micro Computer Stock Help You Become a Millionaire?

super micro computer (SMCI 3.04%), commonly known as Supermicro, has likely been delivering huge profits to investors over the years. The high-performance server producer went public on March 29, 2007, at $8 and currently trades around $423.

If you invested $20,000 in Supermicro stock at the time of the IPO, it would be worth $1.06 million today. But the lion’s share of these gains have occurred in the last few years.

Supermicro’s growth was driven by robust sales of high-end servers, which also accelerated as the artificial intelligence (AI) market expanded. close partnership with nvidia (NVDA 0.27%) It also gave it access to the chipmaker’s top-tier server GPUs before Supermicro’s larger competitors, and the company carved out a high-growth niche in the saturated server market.

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However, even after a huge uptick in 2022 and 2023, Supermicro still appears to be valued at a modest $23 billion, or a reasonable 21 times next year’s expected earnings. So can these hot AI stocks turn your new $20,000 investment back into $1 million or more?

How fast is Supermicro growing?

From fiscal 2007 to fiscal 2021 (ending June 2021), Supermicro’s revenue grew at a CAGR of 16%. This fairly steady growth has been driven by expansion in the cloud, data center, edge computing, 5G and AI markets.

But the development of a new generative AI platform has fueled Supermicro’s business. The company’s revenue grew 46% in fiscal 2022 and 37% in fiscal 2023, and analysts expect growth of 61% in fiscal 2024.

Analysts expect Supermicro’s revenue to grow at a CAGR of 26% from fiscal 2023 to fiscal 2026. This growth should be driven by three catalysts: a partnership with Nvidia, growing market share of AI servers, and the expansion of the generative AI market that Fortune Business Insights predicts. This market is expected to grow at a CAGR of 48% from 2022 to 2030. .

The Mathematical Path to $1 Million

If Supermicro’s valuation remains stable, the company would need to grow its earnings at an average of 17% per year over 25 years to turn a $20,000 investment into $1 million. Although that goal appears achievable compared to past growth, the company may face three major challenges.

First, Supermicro still controls a much smaller portion of the pre-built server market. hewlett packard enterprise (HPE 0.85%) or dell (dell -2.03%). Both rivals could hit back at Supermicro with new AI servers, strike similar deals with Nvidia, and lure potential customers with cheaper hardware.

Second, the AI ​​market may be cooling after the frenzied buying of AI chips and servers over the past two years. This would be bad news for Supermicro, which currently generates about half of its revenue from dedicated AI servers. If its core growth engine slows, the company’s stock could be reassessed to reflect a view of the company as a legacy server maker instead of a hot AI stock.

HPE and Dell, which are growing more slowly than Supermicro, trade at 8 and 12 times forward earnings, respectively. The stock could be cut in half if investors decide that Supermicro is in the same basket as the two older server makers.

Finally, we can expect several recessions over the next 25 years. Large companies will inevitably curb spending on large-scale AI upgrades during this downturn, and as an underdog, Supermicro may struggle more than HPE and Dell in these market conditions.

It’s a good long-term play in the AI ​​market.

Supermicro should continue to grow, but it’s quickly turning into an all-in bet on the AI ​​market. If the company can maintain a close partnership with Nvidia and continue to grow its share of the nascent AI server market, it could still be a millionaire stock. But it could be a bumpy ride, and investors should watch Supermicro’s competition and rising valuation closely.