(Bloomberg) — For more than a year, Nvidia Corp. has been the go-to trade for investors seeking exposure to the red-hot growth story of artificial intelligence. And yet there’s a lower-profile stock that has grown faster, rallied way more and is still cheaper than the most magnificent of the Magnificent Seven.
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Super Micro Computer Inc. has more than doubled this year, building on last year’s surge of about 250% and easily eclipsing the returns of other AI-related shares, like Nvidia, Advanced Micro Devices Inc. and Microsoft Corp. It’s now up some 700% since the end of 2022 amid robust demand for its servers, the infrastructure for the chips that in turn run artificial-intelligence applications.
California-based Super Micro now has a market capitalization around $37 billion, more than eight times its size at the end of 2022. It’s also bigger than half the members of the S&P 500 Index, even though it belongs to a measure of mid-cap stocks. Granted, it’s still a far cry from Nvidia, which tips the scales at roughly $1.7 trillion.
The catalyst for the latest strength came last month, when the company’s preliminary quarterly results far exceeded expectations, signaling solid appetite for AI servers, including Super Micro’s cooling systems. It subsequently raised its revenue forecast.
“For Super Micro it doesn’t matter who wins the AI race, since if you’re buying AI chips, whether from Nvidia or someone else, you will need them connected and you will need them cooled, and that’s where it comes in,” said J. Dennis Jean-Jacques, founder and chief investment officer at Ocean Park Investments.
“It is a backdoor into playing AI,” he said, “and given how predictable we expect the cash flows to be, a value investor’s way to participate.”
‘Must-Have’
The stock jumped 14% Monday, cementing its position as the top performer this year on the S&P Midcap 400 Index. It was little changed Tuesday.
Charles Liang, Super Micro’s co-founder and chief executive officer, has seen his wealth surge alongside the stock. Monday’s rally boosted his fortune to $5.2 billion, according to the Bloomberg Billionaires Index. That’s still a long way from Nvidia’s Jensen Huang, who’s worth $61.2 billion, making him the 22nd-richest person in the world.
Super Micro’s servers are the hardware that’s used to run AI chips, from Nvidia or other producers. Customers can use thousands of these chips, generating tremendous heat.
Hans Mosesmann at Rosenblatt Securities called Super Micro’s liquid cooling system “a must-have for next-generation AI compute hardware solutions.” The company is like “the Switzerland of AI,” benefiting from overall AI growth as opposed to growth in specific clients, he said.
Read more: Super Micro’s Super Gains Forge $3 Billion Fortune for Founder
There are signs that some traders see the stock’s rally as getting frothy. Short interest, a measure of bets it will fall, is at a 52-week high of 13% of the float, according to data from S3 Partners as of Monday.
It’s also the 15th-most-popular stock among retail investors, luring more net retail purchases than widely followed companies like Meta Platforms Inc. or Netflix Inc., according to the latest weekly data from Vanda Research. Vanda saw that as a potential risk if those buyers opt to rotate out in favor of larger stocks.
Analyst Optimism
Still, Wall Street analysts are growing more optimistic about the company’s prospects.
The consensus estimate for Super Micro’s net 2024 earnings has soared 66% in the past six months, according to data compiled by Bloomberg. The forecast for revenue is up more than 20% in the past week alone, and overall revenue is expected to more than double this year. Revenue grew nearly 40% in its 2023 fiscal year, above Nvidia’s pace.
The rising expectations have tempered the impact that the stock’s strength has had on its valuation. Shares trade at 26 times estimated earnings, making them cheaper than Nvidia, at about 33 times, and near the Nasdaq 100’s multiple of 25.4.
For Jean-Jacques at Ocean Park Investments, that means it’s still appealing.
“We sleep better with a company focused on infrastructure, and because of how strong and secure we think the cash flow will be, the price looks pretty interesting even with the rally it has already seen.”
–With assistance from Jeran Wittenstein and Vernal Galpotthawela.
(Adds detail on CEO’s wealth.)
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