The S&P 500(SNPINDEX: ^GSPC) is the most popular benchmark for the U.S. stock market. The index includes 500 large-cap companies, currently defined as companies worth at least $18 billion, and it covers about 80% of domestic equities by market capitalization. To be considered for inclusion, a company must also be profitable, and its stock must be sufficiently liquid.
Super Micro Computer(NASDAQ: SMCI) became the newest artificial intelligence (AI) company in the S&P 500 when it joined the index in March 2024, little more than a year after it joined the S&P MidCap 400 in December 2022. Meanwhile, shares soared over 1,700% over the last two years as strong demand for AI computing products fueled rapid sales growth.
The stock still carries a consensus rating of "buy" among Wall Street analysts, and the median price target of $965 per share implies 26% upside from its current price of $762 per share. Here's what investors should know about Supermicro.
Super Micro Computer is gaining share in the AI server market
Super Micro Computer develops accelerated computing platforms, such as storage and servers for enterprise and cloud-data centers, purpose-built for use cases like 5G and artificial intelligence (AI) applications. Its platforms integrate the latest chips, memory, and storage solutions from suppliers like Advanced Micro Devices, Intel, and Nvidia, such that Supermicro offers customers a high degree of flexibility in customizing their computing products.
Additionally, the company has a unique building-block approach to product development. It can usually integrate the latest technologies into its servers and bring them to market before other manufacturers. On the recent earnings call, CEO Charles Liang told analysts, "We provide optimized AI solutions at scale, offering a time-to-market advantage and shorter lead times over our competition."
Analysts at Bank of America think that competitive advantage will boost its market share in artificial intelligence servers, such that Supermicro accounts for 17% of sales in 2026, up from 10% in 2023.
Jim Kelleher at Argus is also bullish. "We believe Supermicro has a head start on the legacy server vendors and is the partner of choice with Nvidia and other industry leaders for AI implementations," he wrote in a note to clients. "Supermicro is emerging as a go-to provider for data-center implementation of GPU computing infrastructure used in training large language models (LLMs), inference, deep learning, and other elements that enable generative AI applications."
Super Micro Computer suffered a small setback in the third quarter
Supermicro shares plunged 15% when the company reported third-quarter financial results that missed estimates on the top line, but investors may have overreacted. Revenue increased 200% to $3.8 billion during the quarter, just short of the 209% growth Wall Street anticipated. However, non-GAAP net income still surged 308% to $6.65 per diluted share, easily topping the 255% growth that analysts forecasted.
Regarding the light revenue, Supermicro would have delivered more products had it not been supply constrained, according to CEO Charles Liang. Indeed, management reported record demand for liquid-cooled, full-rack AI systems, and the company was first to market with products featuring Nvidia's new Grace Blackwell GB200 processors, which pair one Grace CPU and two Blackwell GPUs.
Moreover, Supermicro actually raised its full-year revenue outlook. Guidance at the midpoint now implies 110% sales growth in fiscal 2024, which ends on June 30. The company previously forecasted 104% sales growth, and Wall Street had penciled in 106% sales growth. In short, Supermicro sees itself on a loftier growth trajectory than it did before Q3, so the recent drawdown looks like a buying opportunity.
Super Micro Computer stock trades at a surprisingly reasonable valuation
The AI server market is forecasted to grow at 47% annually between 2023 and 2028, according to JPMorgan Chase. Supermicro is well positioned to benefit from that tailwind. Indeed, Wall Street expects the company to grow earnings per share at 49% annually over the next three to five years.
That consensus estimate makes its current valuation of 42.7 times earnings look very reasonable. I say that because its price-to-earnings-to-growth (PEG) ratio, which compares the price-to-earnings ratio to forecasted earnings growth, is currently below 1. For context, Nvidia currently has a PEG ratio of 2, and Amazon and Microsoft have PEG ratios of 2.2 and 2.5, respectively.
Of course, shares could sink if the company grows earnings more slowly than Wall Street anticipates. But patient investors comfortable with that risk should consider buying a small position in Supermicro, the newest AI stock in the S&P 500.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Bank of America, JPMorgan Chase, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
