Supermicro’s stock quadrupled in 2024. Is there room for more money?

That’s easy to see super micro computer (SMCI -5.42%) has been one of the stars so far in 2024. The stock is up more than 300%, meaning the stock has quadrupled since the beginning of the year. To put it more simply, if you invested $1,000 on January 1, it would now be worth $4,000.

Considering that the high-performance server maker started the year with a market value of about $15 billion, this rise is truly impressive. But this move has many investors wondering, “Should I keep buying, holding, or selling?” I’m starting to have the same concerns.

Let’s take a closer look at supermicros (as they’re often called) and see if they’re a mountain peak or just the beginning of something bigger.

Take advantage of the AI ​​demand wave

Supermico has benefited greatly from the increased demand for computing infrastructure, particularly due to artificial intelligence (AI) workloads. The core of AI computing is graphics processing units (GPUs), but a proper setup requires hundreds or thousands of GPUs or more.

To get the most out of this hardware, it must be properly networked to your cluster and other computing components. These servers are built and designed by Supermicro, but what sets Supermicro apart from the competition is their highly customizable products.

Customers can consider their computers based on workload type and size, making Supermicro’s products preferable over competitors’ products, e.g. IBM or Hewlett Packard’s). This preference was reflected in its quarterly results, which reported revenue of $3.67 billion for the second quarter of fiscal 2024 (ended December 31), up 103% year-over-year.

But that’s just the beginning. For the next quarter, management expects revenue of $3.7 billion to $4.1 billion, which would represent growth of 188% to 219%. It expects sales to reach about $14.5 billion in fiscal 2024, but that’s a far cry from where management believes the business will go long-term. Supermicro believes it can generate $25 billion in annual revenue through its entire IT solutions ecosystem.

This lends credence to the notion that Supermicro’s stock could have more upside. But that success may already be reflected in the stock price.

The stock carries a high price tag.

Part of Supermicro’s impressive rise is that it entered the year undervalued. At just 13 times future earnings, it’s already ripe for upside, but no one expected these rates to rise. At 52x future earnings, Supermicro Computer is significantly more expensive than the AI ​​king. nvidia (Trading at 36 times forward earnings)

SMCI PE Ratio (Forward) Data from YCharts

Over the past decade, Supermicro has traded at about 19 times trailing earnings. Using this as a baseline valuation, we can determine what kind of growth Supermicro needs to get back to its historical levels.

If management hits its $25 billion sales target and maintains an 8% profit margin, Supermicro will earn $2 billion in annual profits. Dividing the current market capitalization ($64 billion) by the hypothetical ideal return results in a price-to-earnings (P/E) ratio of 32 at the current stock price. This is well above historical valuation levels.

So Supermicro needs to achieve its long-term goals and maintain its margins to trade at a 68% premium to historical valuation levels, and not increase a single penny from its current price. This isn’t a great case for stocks.

With that in mind, it’s likely that Supermicro’s stock will continue to rise as many people who missed out on the early move try to get their hands on the stock. Super Micro Computer will likely be a successful business in 2024 and beyond, but with all the assumptions and strong growth reflected in its stock price, it is possible that the stock may not achieve the same success after its dramatic rise.

If I were a shareholder (which unfortunately I am not), I would sell here to lock in some profits.