Tremendous Micro Laptop Inventory Is Ridiculously Costly Thanks To AI (NASDAQ:SMCI)

Tremendous Micro Laptop (NASDAQ:SMCI) inventory has been surging extremely for some time. Up to now, 2024 has been additional good for SMCI’s stockholders. That is all because of the AI hype. Nevertheless, the market will not be absolutely irrational. The corporate’s gross sales and income are rising quick, and Tremendous Micro Laptop has a wonderful monetary place. However the inventory is extremely overvalued. So, I might charge the corporate’s inventory as a “hold,” as a result of it’s neither a “buy” as a consequence of its extreme valuations nor a “sell” due to its robust monetary place and profitability. On this article, I cannot attempt to guess SMCI’s future inventory worth however will attempt to analyze the corporate’s views and its inventory’s truthful worth as of right now.

Abstract of my earlier article on SMCI

In my earlier article on SMCI, I used to be relatively cautious about the inventory when it traded for $260 per share. Most traders’ curiosity was because of the reputation of AI shares. As I’m penning this, the inventory is buying and selling for $1062 per share.

This, nevertheless, doesn’t imply that I used to be mistaken. I discussed that the corporate was in an excellent monetary place and was worthwhile too. However even at $260 per share, it was overvalued, given the earnings and revenues it had on the time. Furthermore, I discussed that earnings solely began rising considerably in 2021. Earlier than that, there was no apparent and sustainable development. Additionally, the revenue margins have been fairly low. Nevertheless, I didn’t say the shares had no upside potential. The truth is, I rated the corporate as a “hold’. In this article, I will analyze SMCI’s recent developments and its valuations. In short, not much has changed for the company. The margins are not extremely high, and investors are still overenthusiastic about AI stocks, but the company is still in a very good financial position. But SMCI’s stock valuations have surged by almost 300%, and the market for AI servers SMCI produces has become more competitive.

SMCI’s 2Q 2024 earnings and management’s outlook

In my view, SMCI’s recent financial results do not justify valuations. Let me explain why.

Listed here are a number of highlights of Supermicro’s earnings press release:

In spite of the fact that Supermicro is considered to be a highly profitable company, the gross profit margin for the second quarter of 2024 was just 15.5%. The net profit margin for 2Q 2024 was $296 million / $3.66 billion x 100 = 8,09%. SMCI’s net profit margin is very good compared to peers, most notably Dell’s (DELL) and Western Digital Corporation’s (WDC) margins. However, SMCI’s gross profit margin is quite low compared to its peers, most obviously FUJIFILM Holdings Corporation’s (OTCPK:FUJIY) and Hewlett Packard Enterprise’s (HPE) margins. Solely Western Digital Company’s (WDC) gross revenue margin is decrease.

As reported in the press release, as of December 31, 2023, total cash and cash equivalents were $726 million, and total bank debt was only $376 million. This means that the company’s financial position is brilliant because its net debt is negative. Although the company is financially sound, its stock is still trading too high.

Charles Liang, President and CEO of Supermicro, mentioned, “We continued to display our market management in fiscal Q2 2024, reporting report income outcomes of $3.66 billion and year-over-year development of 103%.” “Whereas we proceed to win new companions, our present finish clients proceed to demand extra of Supermicro’s optimized AI pc platforms and rack-scale Whole IT Options. As our progressive options proceed to achieve market share, we’re elevating our fiscal 12 months 2024 income outlook to $14.3 billion to $14.7 billion.“

In other words, the management says the company’s market share is high and growing thanks to its innovative solutions. Let’s take a look at some of the company’s competitors and compare their market shares to SMCI’s.

Supermicro’s market share

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Supply: CSI Market

As you can see from the table below, SMCI has a much higher market share compared to its smaller rival companies. However, the company’s market share is still substantially lower than its larger competitors, namely Hewlett Packard, HP, and Dell. SMCI’s bigger rivals are also doing well. For example, Dell reported a backlog surge for its AI servers and suggested that more growth is yet to come. This high-tech company reported a 40% quarter-over-quarter rise in AI server orders.

Dell has already made substantial progress in the area of AI servers. The company reported a massive backlog for its artificial intelligence servers and said that more growth is coming. The tech giant reported a 40% quarter-over-quarter increase in AI server orders. So, Dell seems to be a serious competitor to SMCI in this area. These two companies can enter a price war. This will likely lead to lower profits for both of them. Moreover, Hewlett Packard is also entering the AI server industry, which will mean even more pricing pressure and lower profit margins.

SMCI is relying on sales growth to get more profitable. So, the company can experience problems if revenue growth slows down. According to the company’s guidance, total revenue for the third quarter of 2024 will range from $3.7 billion to $4.1 billion. If we compare this to SMCI’s $3.66 billion in Q2 FY24 revenue, the outlook suggests a quarter-over-quarter growth rate will be between 1.1% and 12%. So, the growth rate will not be too high, even according to the management’s own projections.

Low quarterly growth rates will eventually lead to low growth for the entire year 2024. That development will minimize the company’s net income gains. Super Micro Computer must exceed analysts’ expectations to remain a growth stock in the eyes of investors because the market already expects sales to be as high as $4.1 billion. Let us have a look at the quarterly growth history.

Quarterly revenues

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Source: Prepared by the author based on Seeking Alpha’s data

Quarterly revenues

Quarterly internet earnings

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Source: Prepared by the author based on Seeking Alpha’s data

Quarterly internet earnings

Super Micro’s earnings and sales growth over the past year were mostly due to the September 2023-December 2023 period. For the rest of the period covered, net income and revenue growth were flat. In my “valuations” section, I will compare Super Micro’s earnings and sales growth to its stock price gains.

Lack of sustainability is also seen in the annual revenues and profit graphs below. In other words, sales and earnings have only started growing after 2021, thanks to AI. Before that, there was no obvious progress.

Annual revenues

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Source: Prepared by the author based on Seeking Alpha’s data

Annual revenues

Annual income

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Source: Prepared by the author based on Seeking Alpha’s data

Annual income

Between 2021 and 2023, the total net profit rise was about 500%, which is great but still not impressive enough, given the share price growth.

Valuations

Super Micro Computer’s valuations are extremely high, especially if we compare the company’s stock price to its sales.

But also, the quarterly diluted EPS gained 880.8% as opposed to SMCI’s stock price gains of 3090%.

The quarterly revenues only rose by 341.4% as opposed to SMCI’s stock price surge of 3090%.

If we have a look at the company’s price-to-earnings (P/E) ratio, we will see that it is almost 79 and is just slightly off SMCI’s high of about 90. This is really high because the S&P 500’s average is just about 23. SMCI’s average P/E used to be 20-30 before this year’s stock price surge. So, if we take the average P/E and multiply it by 2023’s EPS of $12.09, SMCI’s stock should now trade for $241.8 to $362.7 per share. And that would not be cheap but rather reasonable. You might argue that 2024 would be much better than 2023 in terms of earnings. But it is still not clear because 2024 is not over yet.

If we take a look at the company’s competitors, we will clearly see that SMCI’s P/E, P/S, EV/EBITDA, and P/B ratios are substantially higher than its competitors. SMCI’s P/E GAAP (TTM) of almost 79 is three times higher than DELL’s. SMCI’s P/S ratio is also stunning compared to its peers. It is almost 6, whilst all of its competitors is less than 2. But the strangest indicator is SMCI’s P/B ratio, which is higher than 18. For example, HPE’s is just a bit over 1.

I believe that SMCI’s stock is extremely overvalued, both historically and compared to its peers.

Downside risks

The company has the following downside risks:

• SMCI stock is priced as if the company does not have any competition. But that can change in the long term. So, the stock price would go down substantially.
• SMCI does not have a very high profit margin. It can get even lower if sales growth slows down.
• A recession can happen at any time. Overvalued stocks like SMCI will likely depreciate the most.

Upside dangers

The upside dangers are as follows:

• AI offers plenty of growth potential for companies like SMCI. However, it is not entirely clear who will “get there first.”.
• The company’s financial position is stable. This is important in times of crisis.
• SMCI has recently shown great sales and profit growth and has become a very popular stock for investors. So, if growth continues, its valuations will still stay high.

Conclusion

Since my last article, the company has shown brilliant performance in terms of revenues and profits growth. But I do earnestly think that Supermicro’s stock price growth has far exceeded its EPS and sales progress. So, thanks to the market’s interest in artificial intelligence, the stock has got ridiculously overvalued. But I am not saying that SMCI is an immediate sell. The stock can still rise if the company continues to report growth. And it is impossible to say when a stock rally for a highly popular tech company will be over. However, it seems that the market for AI servers is growing competitive. I believe 2024 might be even better than 2023 in terms of earnings and sales, as the management expects in their outlook, but there are risks they might touch the lower end of the guidance thanks to stiffer competition. This might be quite a disappointment for the company’s investors. So, my rating is “maintain.”