Super Micro Computer (NASDAQ:SMCI) stock still has multiple, strong, positive catalysts. Among them are the rapid growth of artificial intelligence, the firm’s ongoing, critical competitive advantages and its market share gains. Also importantly, the valuation of Super Micro Computer stock remains very attractive while worries about its profit margins are overdone.
Given these points, I continue to recommend investors buy Super Micro Computer stock.
AI Continues to Grow Rapidly
Super Micro sells servers, racks and storage systems that facilitate the creation and utilization of AI. And there are multiple signs AI is continuing to quickly expand and will do so for a long time.
On June 26, memory chip maker Micron (NASDAQ:MU) reported data center demand for AI continued to increase rapidly during the firm’s fiscal third quarter ending in May. What’s more, the firm expects its revenue from data centers to “reach record levels” this year before rising “significantly” in its upcoming fiscal year. In fact, CEO Sanjay Mehrotra is so confident in “AI-driven demand” for its data center products that he expects to raise prices on these offerings for the rest of 2024.
Meanwhile, one of Super Micro’s key partners, Nvidia (NASDAQ:NVDA), noted recently that it is looking for new markets for its chips, including healthcare and industrial robots. As Nvidia and its peers successfully enter many new markets, they will buy much more Super Micro hardware.
Indeed, sales in the AI server sector are expected to rise at a very high compound annual growth rate of 30% between 2024 and 2033.
Super Micro’s Continued Competitive Advantages
According to Seeking Alpha columnist Livey Investment Research, Super Micro is still the only AI server maker that can provide large amounts of servers with direct liquid cooling (DLC) mechanisms. Super Micro believes that 15% of the AI servers it will sell in the next year will have the DLC feature, while the proportion will climb to 30% the following year.
DLCs significantly reduce data center power consumption. Over the longer term, the proliferation of data centers and electric vehicles is expected to cause U.S. electricity demand to jump a great deal. As a result, electricity prices are likely to climb meaningfully and electricity shortages could become prevalent. Consequently, the demand for Super Micro’s DLCs is likely to strengthen significantly.
Meanwhile, Super Micro will continue to benefit from its close partnerships with Nvidia, Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD). These alliances allow Super Micro to provide new products tailored to the chip makers’ latest offerings before its competitors can.
Market Share Gains, Valuation, and Overdone Worries
Super Micro has kept its prices competitive in order to drive continued market share gains going forward. These share increases should meaningfully boost the firm’s top and bottom lines for the foreseeable future.
On the valuation front, Super Micro Computer stock is changing hands at 26 times analysts‘ mean 2025 earnings per share estimates. Since analysts, on average, expect the firm’s EPS to jump 24% in 2025, that’s a rather low price-to-earnings ratio.
The major reason why Super Micro stock seems range-bound for several months appears to be concern about its profit margins. Of course, these fears stem from the firm’s efforts to avoid raising its prices much even as it builds its inventories in an effort to meet demand.
But the company’s inventory expansion is likely to ease going forward. Moreover, SMCI’s DLC servers actually cost less to build than regular ones. The company’s expansion of its new factories are also expected to impact its margins positively.
Finally, analysts on average expect the company’s earnings per share to jump to $23.86 this year from $11.81 last year. They expect it to grow further in 2025 to $34.24 per share. These estimates shows that they are not overly worried about the company’s profitability.
On the date of publication, Larry Ramer held long positions in SMCI and MU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.