SMCI: an "AI winner" with servers housing AI chips

Catalysts

• Robust Revenue Growth:
  • In the third quarter of 2024, SMCI reported impressive revenue growth. Their revenue reached $3.85 billion, which represents a remarkable 200% year-on-year increase.
  • The company’s full fiscal year revenue guidance has been raised to a range of $14.7 billion to $15.1 billion.
• Profitability and Margins:
  • SMCI’s non-GAAP earnings per share surged by 308% year-on-year, reaching $6.65 in Q3 2024.
  • Although the gross margin slightly increased to 15.6% quarter-over-quarter, the company aims to maintain it within the 14% to 17% range.
  • Operating expenses have also seen significant growth, but this is expected to normalize over time.
• Strategic Moves and Expansion:
  • SMCI has been expanding its manufacturing presence in the US, Taiwan, and Malaysia. This expansion is aimed at significantly increasing server production, with a strong focus on AI applications.
  • The company’s new 5S business program, APAC production expansion in Taiwan, database-driven intelligent auto-configurator, and B2B/B2C automation platform are key drivers for accelerating growth.
• Innovative Solutions:
  • SMCI’s rack-scale plug-and-play solutions have contributed to market share gains. These solutions reduce deployment time and energy costs through efficient cooling.
  • The introduction of products like the GB200, which supports high power densities and advanced cooling solutions, has also driven growth.
• Financial Activities:
  • SMCI raised $3.28 billion through convertible notes and secondary equity offerings, indicating strong investor interest and capital infusion.

In summary, SMCI’s strategic moves, focus on AI, innovative solutions, and strong financial performance have positioned it for continued growth in the server and storage market.

Risks

• Supply Chain Disruptions:
  • Like many tech companies, SMCI is vulnerable to supply chain disruptions. These disruptions can arise from factors such as component shortages, geopolitical tensions, or natural disasters. Any interruption in the supply chain could impact production and delivery timelines.
• Competition:
  • The server and storage market is highly competitive. SMCI competes with other major players like Dell, HPE, and Lenovo. Maintaining market share and pricing competitiveness is crucial.
  • New entrants or disruptive technologies could also pose a threat. SMCI needs to stay agile and innovative to fend off competition.
• Regulatory and Compliance Challenges:
  • As a global company, SMCI must navigate various regulatory environments. Changes in trade policies, export controls, or data privacy regulations can affect their operations.
  • Compliance with industry standards (such as security certifications) is essential for customer trust.
• Technological Shifts:
  • The tech industry evolves rapidly. SMCI needs to adapt to emerging technologies like edge computing, AI, and 5G. Failing to do so could lead to obsolescence.
  • Keeping up with hardware advancements (e.g., faster processors, higher memory capacities) is critical.
• Cybersecurity Risks:
  • As a provider of server solutions, SMCI handles sensitive data. Cyberattacks, data breaches, or vulnerabilities in their products could harm their reputation and financials.
  • Ensuring robust security measures and staying ahead of threats is essential.
• Macro-Economic Factors:
  • Economic downturns, inflation, or currency fluctuations can impact SMCI’s business. A slowdown in IT spending could affect demand for their products.
  • The ongoing COVID-19 pandemic has highlighted the importance of risk management in uncertain times.
• Environmental Concerns:
  • The tech industry faces scrutiny regarding its environmental impact. SMCI must address energy efficiency, e-waste, and sustainable practices.
  • Customers increasingly consider environmental factors when making purchasing decisions.

In summary, while SMCI has strong growth prospects, it must navigate these challenges to sustain its success. Vigilance, adaptability, and strategic planning are key.

Assumptions

• Market Share Gains:
  • SMCI’s growth is driven by its rack-scale plug-and-play solutions. These solutions reduce deployment time and energy costs through efficient cooling.
  • The introduction of products like the GB200, which supports high power densities and advanced cooling solutions, has contributed to market share gains.
• AI-Driven Demand Growth:
  • Over 50% of SMCI’s revenues are tied to accelerators like GPUs.
  • The company is positioned as an “AI winner” due to its valuable business relationships and strengths in the high-performance server market.
• Technological Advancements:
  • SMCI’s focus on new platforms and technologies, such as liquid cooling and advanced AI solutions, should support maintaining gross margins within the 14% to 17% range.
  • Expansion in Malaysia is expected to contribute to economies of scale and potentially enhance margins.

In summary, SMCI’s growth is fueled by financial performance, market share gains, AI-driven demand, and technological advancements. However, investors should closely monitor these catalysts and consider their impact on the company’s future prospects.

Valuation

Business Outlook:

• Super Micro Computer, a maker of servers, storage systems, and other data center components, recently reported its first $3 billion quarter, surpassing its entire annual revenue from just a few years ago.
• Looking ahead, SMCI’s substantial expansion into the AI industry and its partnerships with other companies indicate a potential catalyst for further growth.

Revenue and Profit Margins:

• Analysts predict that Super Micro’s profits will grow at a staggering 62% annually for the next five years yet shares trade below that rate. Given the shares are trading below that rate, profit margin is set at 14.38% annually reflecting the 62% growth in net profits.
• As for revenue, the company’s management projects up to $14.7 billion for the fiscal year ending June 30 at a CAGR in excess of 40% to reach a $1 trillion valuation by 2030, assuming its P/S multiple. However, the five year average revenue growth YoY has been around 20%. So, I conservatively set at its current revenue growth rate at 20%.

Valuation Multiple:

• Currently, SMCI stock trades at around 43 times trailing earnings and 4 times sales, which are typically expensive valuations.
• Forward P/E is currently projected at approximately 35 times.