Wall Street Analysts Favor Super Micro Computer, Inc. (SMCI) for AI Growth
We recently published a list of 8 Most Undervalued Growth Stocks To Buy According To Wall Street Analysts. In this article, we are going to take a look at where Super Micro Computer, Inc. (NASDAQ:SMCI) stands against other undervalued growth stocks according to wall street analysts.
Will There Be Another 50 Basis Point Cut Considering the Jobs Report?
Analysts and the market blamed the Fed for not cutting the interest rate earlier in July. However, the sentiments seemed to have shifted with the recent jobs report with above-expectation data. The data from the Job market shows that Nonfarm payrolls increased by 254,000 in September and unemployment rates fell to 4.1% from 4.2%.
These new statistics are making the market think, was the 50 basis point too much another question that comes up is what the Fed will do in the next meeting. Sylvia Jablonski, Defiance ETFs CEO and CIO joined CNBC to talk about the issue recently. She mentioned that Fed is data dependent and every move they make is based on the latest available data. The market was questioning the Fed for the delay in rate cuts, however, the data that the Fed had at the time was pointing towards the job market going the other way. Jablonski thinks that they made the right call to cut the interest rates by 50 basis points. However, with the current jobs market report it is difficult to expect another 50 basis point cut. She thinks that it will either be by a 25 basis point cut or no cut at all.
As of now the market seems to be doing good, the job numbers came in above expectations, and wages are good which tells that the consumers are likely to spend more which will be feasible for the economy. Jablonski also mentioned that the S&P 500 has been up by 20% in 2024 and thinks that the earnings for stocks are strong.
The analysis pointed out by Jablonski and many other analysts currently is pointing towards a soft landing scenario becoming more and more feasible. This becomes particularly important for the growth stocks. Historically speaking value stocks have outperformed growth stocks, however, this has not been the case for the past 10 years. Moreover, according to Ben Snider, growth stocks tend to perform better in a slowing economy with the Federal Reserve cutting rates.
One of the key points to note here is that analysts are suggesting diversifying the portfolio, to look beyond technology stocks and quality growth stocks that have good earnings and prospects of sustained growth. We covered Ben Snider’s interview in 7 Unstoppable Growth Stocks To Buy Now. Here’s a piece from the article:
“On August 15, Ben Snider from Goldman Sachs appeared in a CNBC interview and mentioned that he still prefers growth stocks over value stocks but emphasized diversified portfolios. He pointed out that the base case is not the economy running into recession, it is quite the opposite as the data suggests. Ben Snider believes that the economy continues to grow and backed his arguments by mentioning the second quarter earnings season growth, the S&P 500 growth, and the Federal Reserve rate cuts. Therefore the base case as per Snider is higher equity prices by the year end.
While elaborating on his statement about growth stocks, Ben Snider pointed out that an environment of slowing but healthy economic growth along with falling interest rates have historically supported growth stocks over value stocks.
Most importantly, Snider emphasized that there is a risk for some extremely large stocks both from a positioning point of view and from their inability to maintain very strong rates of growth. In addition, the AI bubble problem along with very high analyst expectations have priced these stocks to an extremely overvalued situation.
The solution, as presented by Snider, is to adopt a more diversified approach and go for a selection of smaller tech stocks along with other high-growth industries. Some of the major growth industries mentioned during the interview were smaller tech stocks, the healthcare industry, and some other European stocks that are on the verge of cutting-edge innovation.”
What are the Broader Implications for Tech Stocks?
The technology sector is one of the main contenders when it comes to growth stocks. Ray Wang, principal analyst and founder of Constellation Research, appeared on CNBC to talk about the broader implications for tech stocks. Wang noted that Wall Street’s favorite chip maker is “priced for perfection”. He anticipates strong earnings due to widespread investments in AI and data center chips across the tech sector. A significant point raised by Wang was the trend of reallocating cybersecurity budgets to fund AI initiatives. Wang suggested that companies believe enhancing AI capabilities could improve their cybersecurity resilience, although this approach carries risks if a major cybersecurity breach occurs.
Wang has stakes in all seven companies in the Magnificent Seven and believes they represent a solid investment thesis amid falling interest rates. He also acknowledged that many analysts believe that falling interest rates are more favorable for other stocks excluding the Magnificent Seven, however, he thinks that big tech stocks are safer and better positioned for growth in the current climate situation.
Wang also made an interesting comparison between the historic time of the internet boom and today’s AI and data center revolution. He highlighted that unlike the decentralized nature of the internet era, today’s tech landscape is more centralized, with fewer dominant players. Thereby indicating that there will be fewer winners with more gains in the tech sector.
Our Methodology
To compile a list of the 8 most undervalued growth stocks to buy according to Wall Street analysts, we used the Finviz stock screener and CNN. Using the screener, we sifted through high-growth industries including Technology, Biotechnology, Renewable Energy, and more to get an aggregated list of 20 undervalued growth stocks.
Our criteria to call a stock cheap/undervalued is as follows: Forward P/E below the market average i.e. 24.35 (as per the Wall Street Journal) and earnings growth positive for the current year, both sourced from Yahoo Finance.
Once we had the list of undervalued growth stocks, we then ranked these stocks based on the analyst upside potential sourced from CNN. The list is ranked in ascending order of the analyst upside potential. Moreover, please note that the indicators used in the article were recorded on October 7th, 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of technicians in a server room, testing and managing the newest server solutions.
Super Micro Computer, Inc. (NASDAQ:SMCI)
Forward P/E: 12.32
Earnings Growth: 52.50%
Number of Hedge Fund Holders: 47
Analyst Upside Potential: 54.01%
Super Micro Computer, Inc. (NASDAQ:SMCI) is another technology company that is riding the AI transformation wave. Artificial intelligence has acted as a catalyst to pace up its growth mainly owing to its next-gen X14 Intel Xeon 6, H14 AMD Turin systems, and liquid cooling clusters. These technologies are important components for high-performance servers and storage solutions, which are the backbone of AI and data centers.
If we look at the past 3 years’ performance of Super Micro Computer, Inc. (NASDAQ:SMCI) we see that the company has been able to grow its net income by more than 121%, while growing its revenue by around 61%.
What’s more impressive about the company is its fiscal fourth quarter results. The results showed that the revenue for the year grew more than twice when compared to 2023 and reached $14.9 billion. The company has been landing significant business and design wins which position it for long-term growth. Multi-billionaire and CEO of Tesla, Elon Musk has recently named Super Micro Computer, Inc. (NASDAQ:SMCI) as one of the providers of AI servers for his startup xAI.
The company is also trading at an undervalued price. It is trading at only 12 times its forward earnings, while the S&P market average sits above 24, making it one of the most undervalued growth stocks to buy according to Wall Street analysts.
Carillon Scout Mid Cap Fund stated the following regarding Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter:
“Super Micro Computer, Inc. (NASDAQ:SMCI) was the top detractor to returns in the second quarter. Super Micro designs and manufacturers server solutions based on modular and open-standard architecture. This modular approach combined with a strong engineering culture helps the company to supply the market with advanced servers and rack-scale compute solutions quickly. After an impressive return in the first quarter, the company offered disappointing near-term earnings guidance, though we do not believe its long-term opportunity has diminished. We expect continued strong growth for several years, although the range of outcomes is quite wide; it is difficult to forecast AI server market growth with precision.”
Overall, SMCI ranks 2nd on our list of Most Undervalued Growth Stocks To Buy According To Wall Street Analysts. While we acknowledge the potential of SMCI to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.