That’s a really great calculation
It is said that the Nasdaq (NDX) tends to lead the broader stock market, and while this may be true, it works both ways. High-flying technology stocks can be the most vulnerable to sharp declines, and today’s rout in Super Micro Computer (NASDAQ:SMCI) stock should serve as a reminder to overzealous buyers of shiny objects.
What are notifications? Hype and hope may dominate in the short term, but sooner or later valuation will matter. There is also a lesson here, as the old saying goes, that trees do not grow straight to the sky.
Super Micro Computer’s trees grew quickly, but are being cut down by today’s market loggers. As meters turn into threshers, high-altitude planes turn into fast crashers and, in fact, an elevator going down may be faster than a malfunctioning escalator in SMCI stock going up.
NVIDIA is incorrect when searching for “next”
For some very nimble and lucky stock traders, finding the “next” NVIDIA (NASDAQ:NVDA) might have been going pretty smoothly for a while. This year, Supermicro Computer’s stock price has surged from $300 to a high of about $1,200 in mid-March.
Riding escalators can be fun, no doubt. As SMCI stock rose without resistance, the claim of being “the next” NVIDIA seemed to be fully realized. After all, artificial intelligence (AI) will still be a hot topic on Wall Street in 2024, and Supermicro Computers specializes in AI-enabled servers.
Next thing you know, Super Micro Computer was added to the S&P 500, and some Wall Street pundits were quick to praise the widely known up-and-comer. For example, Rosenblatt Securities analyst Hans Mosesmann emphasized that Super Micro Computer has “developed a rapid time-to-market model.”
More analysts have joined the bandwagon, with JPMorgan Chase announcing a $1,150 price target for SMCI stock and Northland analyst Nehal Chokshi taking JPMorgan up a notch with a $1,300 price target. Meanwhile, Supermicro Computers served to fan the flames of hype by raising its fiscal 2024 revenue guidance from an already ambitious $10 billion to $11 billion to a much higher range of $14.3 billion to $14.7 billion.
Not all voices on Wall Street are very optimistic about supermicrocomputers. Aaron Rakers of Wells Fargo (NYSE:WFC) had the audacity to say that Super Micro Computer stock “will be very sensitive to signs of easing demand for GPU-based servers.”
Of course, as the bubble expands, warning voices are largely ignored. So, with Super Micro Computer’s fiscal 2024 third quarter financial results expected to be released this month and the company’s pre-earnings results expected to be released on or around today, SMCI continued to trade at higher levels until it didn’t.
the sign was there
In any bubble, there are always at least a few signs that the proverbial emperor has no clothes on. The problem is that for impatient traders, the signs are obvious in hindsight.
First of all, if you thought NVIDIA’s valuation was overvalued, you might be surprised to learn that Super Micro Computer may actually be even more overvalued. NVIDIA’s GAAP-measured 12-month price-to-earnings (P/E) ratio is admittedly quite high at 70.97. To give you some perspective, the industry’s average trailing P/E ratio is 27.1.
However, Super Micro Computer’s trailing P/E ratio of 72.4 is significantly higher than NVIDIA’s multiple. It’s also worth noting that Super Micro Computer’s 5-year average P/E ratio is 19.64. This suggests that the market is not always overvalued for companies involved in supermicrocomputers and AI technology.
Another red flag for those who like to see red flags in a growing bubble was when Supermicro Computers announced that it would “offer” (i.e. print and sell) 2 million shares of its common stock at $875 per share. Despite the stock price downside concerns investors had to consider at the time of the announcement, SMCI stock was on its way to skyrocketing from $900 to $1,200 in a matter of days.
And finally, today Supermicro Computer’s stock price is down 18%. Rather than pre-release the company’s fiscal 2024 third quarter results today, as investors had expected, Supermicro Computers did not provide any pre-release at all and instead announced its regular earnings release date of April 30.
Wells Fargo analysts summarized the market’s disappointment, writing that Super Micro failed to deliver “a positive pre-announcement that was being viewed as a negative.” I’d say that’s an understatement. And I’d like to suggest that the deserved valuation of SMCI stock is a chagrin to bubble blowers everywhere going on right now.
