Hello fellow investors. Have been busy over the past 2 weeks and did not have time to write or analyze new stocks. This time I would like to bring to your attention SMCI stock: Super Micro Computer, Inc.
Why did SMCI stock pique my interest?
According to my strategy, I look for stocks that are relatively undervalued for their expected earnings growth in the next 2 years. I also love companies that are on the recovery path from past sluggish sales, problems, etc. This allows buying the companies before the wider crowd takes notice and starts to move the price higher.
The analysts seem to be warming up to the SMCI stock and predict that Super Micro Computer, Inc. will resume growth after stagnant sales for the past 2 years.
Here is the article that sums up very well some of the positive developments for Super Micro Computer, Inc.
Super Micro makes customized servers for large data center clients, and that business was disrupted by COVID-19, both from a demand and supply perspective. Last quarter, Super Micro's revenue fell 5% year over year but gained 9% quarter over quarter, showing a recovery from the slowdown earlier in the year.
However, Super Micro is about to ramp sales beyond its original customer base. The company just completed a build-out of its Taiwan campus, which will allow it to produce high volumes of cloud servers at lower costs, opening up the large cloud computing market. In addition, Super Micro is beginning to make servers for the 5G/telco market, winning new customers last year and ramping up to higher volumes in 2021.
Super Micro has seen its revenue momentum stagnate over the past couple of years as it had to deal with an accounting scandal, but the company cleaned up its books and was re-listed on the Nasdaq one year ago. Now, CEO Charles Liang is confident the company can grow again and promised an upcoming analyst day where Super Micro will outline its goal of reaching $10 billion in revenue. For context, that's more than triple what Super Micro makes in revenue today.
Despite those rosy growth prospects, Super Micro trades at only 10 times its 2022 earnings estimates. That seems way too cheap for a stock with the potential to triple its sales going forward. Furthermore, Super Micro has $270 million in net cash, and just authorized a $200 million share repurchase program, so management is taking advantage while the stock appears to be on sale.
Super Micro Computer, Inc. Overview: company, category description
Super Micro Computer, Inc., together with its subsidiaries, develops and manufactures high-performance server and storage solutions based on modular and open architecture. Its solutions range from complete server, storage, modular blade servers, blades, workstations, full racks, networking devices, server management software, and server sub-systems, as well as support and services. The company also provides a range of application-optimized server solutions, including rackmount and blade servers, storage systems, and subsystems and accessories; and server software management solutions, such as Server Management Suite, including Supermicro Server Manager, Supermicro Power Management software, Supermicro Update Manager, and SuperDoctor 5. In addition, it offers server subsystems and accessories comprising server boards, chassis, power supplies, and other accessories. Further, the company provides server and storage system integration, configuration, and software upgrade and update services; and technical documentation services, as well as identifies service requirements, creates and executes project plans, and conducts verification testing and training services. Additionally, it offers help desk and on-site product support services for its server and storage systems; and customer support services, including ongoing maintenance and technical support for its products. The company provides its products to enterprise data centers, cloud computing, artificial intelligence, and 5G and edge computing markets. It sells its products through direct sales force, distributors, value-added resellers, system integrators, and original equipment manufacturers. The company has operations primarily in the United States, Europe, Asia, and internationally. Super Micro Computer, Inc. was founded in 1993 and is headquartered in San Jose, California.
The stock price for SMCI was on a recovery path for the past 2 years, forming a cup shape for the past 6 years.
Super Micro Computer, Inc. Financial overview
As mentioned before, Super Micro Computer, Inc. sales have been sluggish over the past 2 years as seen below in the 2 charts. On the positive side, however, despite sales been stalled, the company was working on cost-cutting, increasing its Gross Income and Earnings. The cost-cutting efforts are particularly noticeable for the past 2 quarters when Super Micro Computer increased its Gross Margin to 16.4% as compared to 12.8% in 2018. Its Net Profit margin increased to 3.5% vs. a mere 1.4% in 2018.
Sales in 2020 were hit by COVID, but the company was able to hold sales pretty well. The positive sign is a 9% increase in sales in the most recent quarter. With that, it also achieved the highest level of Net Income seen over the past 5 quarters.
Super Micro Computer is doing well in terms of debt:
Lastly, Super Micro Computer has been adding employees on a constant basis over the past many years.
SMCI Stock Forward Outlook and Predictions
As mentioned before, analysts predict that SMCI sales will resume growth in the next 2 years.
With growing revenue, the company is expected to grow its EPS in the next 1.5 years to $3.123.
SMCI stock Key financial ratings/Stock Value
At its current EPS of $2.7 for the past 4 quarters, the company is trading at a PE ratio of 12.
If we calculate a forward PE for the period ending June 2020, taking an expected EPS of $3.12 this would give us a forward PE (at the current price) of $32/$3.12 = 10.2.
Generally, the company is quite undervalued as investors have been shying away from it given it went through times of sluggish sales and past accounting issues. However, I believe that as soon as the company starts growing the price will quickly increase to match a PE of 20 or above, meaning our price target is at least $60 for the end of 2022. At that moment you may choose to continue holding the stock as if its growth continues it can go up to $100 or even more.
On another positive note, the company is currently going through a share repurchase program. It has already completed one program and is currently going through a second round.
Previously Authorized Program:
• Completed on January 6, 2021
• 1.68M shares at $29.82 average price
Newly Authorized Program Details:
• $200M share repurchase authorization approved
• Effective until July 31, 2022 or until authorized funds fully deployed, whichever occurs first
At the current price of ~$32, the company seems to be reducing its current public float of 50.5 million shares by a whopping 6.25 million shares.
SMCI stock Analysts Ratings
There are 4 analysts providing ratings and estimates for SMCI stock. All four give a "STRONG BUY" rating for the company. The average price target for SMCI stock is $41.50 which represents an implied gain of 31% over the current SMCI stock price. The highest price target stands at $48 and the lowest is $38.
SMCI stock risks
There have been past problems with the accounting quite recently (in 2020)
It seems the company is trying to make everything possible this issue does not happen again.
Also, there is a weird article from Bloomberg that SuperMicro immediately refuted. To be honest, the whole situation is puzzling as Bloomberg makes claims that it cannot support, but SuperMicro provides enough evidence to refute. The article from Bloomberg was issued just recently (Feb 12th, 2021) and it has not yet come with any evidence, but they did not take back their article either.
Specifically, I liked how SuperMicro slammed Bloomberg in this statement:
Bloomberg's story is a mishmash of disparate and inaccurate allegations that date back many years. It draws farfetched conclusions that once again don't withstand scrutiny. In fact, the National Security Agency told Bloomberg again last month that it stands by its 2018 comments and the agency said of Bloomberg's new claims that it "cannot confirm that this incident—or the subsequent response actions described—ever occurred." Despite Bloomberg's allegations about supposed cyber or national security investigations that date back more than 10 years, Supermicro has never been contacted by the U.S. government, or by any of our partners or customers, about these alleged investigations.
Here is a bit of analysis of the situation which points to the fact that SuperMicro is likely moving its factory to Taiwan (2.5 times the production capacity of the current factory in China) to 1) reduce costs, 2) but also, make sure there is no future risk of such allegations.
Disclaimer: As usual, trade at your own risk. I own SMCI stock. I do not suggest you should buy any of the stocks I write about. As usual, please do your own due diligence before investing your own money in any of the stocks I write about. The above analysis is quite basic and just gives ideas for further research. A much deeper analysis is required for each stock, including the analysis of operations, debt, etc. I may sell any of the stocks I say I currently own at any moment before it reaches the targets that I set or keep them for even when they reach the target.