SMCI Preannounced July 20th, so no surprise on the numbers, but everyone was looking at forward guidance
Rev 2.18b vs 1.64b or 33% YoY (1.28b last quarter so 70% QoQ)
EPS 3.43 vs 2.60 or 32% YoY (1.53 last quarter so 124% QoQ)
non GAAP EPS 3.51 vs 2.62 (1.63 prior quarter)
GM slightly lower at 17% vs 17.6% prior year and quarter
Guiding to 1.9b to 2.2b, EPS 2.02 to 2.80, non GAAP EPS 2.75 to 3.50 for 1Q24 (ending 9/30/23).
Guiding to total net sales of 9.5b to 10.5b for fiscal 2024. The midpoint of which would be 40% increase YoY. At that level EPS of 10 - 14 and non GAAP EPS of 13.75 to 17.5
Was down AH -17% at one point, but has settled at -9% now. At current AH price the one year forward PE is 26 at the GAAP midpoint and 20 at the non GAAP midpoint - seems to be reasonable as the stock has gotten pretty extended, up 314% YTD at close and up almost 800% from last July
It’s grown to be my #2 holding - watching it closely and might shift some things around to add more at the open if it drops under 300 again
Earnings call highlights:
- AI exposure for the quarter was 50%, CEO points to close relationship (both personal and business) with NVIDIA, and focus on being first to market with cost saving solutions. Expecting AI segment to continue to increase as a percentage of total revenue
- Question about supply chain and lack of available key input components - again points to working relationship with vendor, notes that it’s not 100% within their hands, but they have the capacity to manufacture and deliver whenever the raw materials are ready
- A few questions about how they will hit their projected 10.5b target for the year with the shortages from vendors - notes their customers are wanting 20x the servers they currently have, so once vendors capacity catch up, the backlog is very visible for the next few years - expecting 20b in revenue within a couple of years
After the ~23% drop Wednesday SMCI is now back to reasonable valuation range - at around 26 trailing and 16 forward P/E
Even if they will hit 17.5, at $260/share their fwd PE sits around 15. Investing in SMCI is all about whether or not you believe a PE of ~15 is too low. I don’t. Because it completely hinges on whether or not they’ll have another year of huge growth in f2025 (and beyond, of course). I guess if you believe they really have a differentiated product, maybe you can believe that they will have years of growth ahead. But then why are gross margins so low?
Any commentary from mgmt on that? Definitely something to watch.
It was said on the call that the slightly lower margin is due to focus on strategic new design wins and gaining market share.
They expect GM to stay at 17% for next Q and aim to hold that in the future.
Basically, the whole conference call and Q&A was all about supply shortages. Demand is high, but… the question is, where will the customers turn to if they can’t deliver? Is their product so much better than their competitors? Will they wait or order their stuff from another vendor?
My research on tech boards, people I talked to who are working in the industry and gross margin trajectory all indicate that the technical difference (liquid cooling, efficiency) is not that big. Their biggest advantage imo is the good relationship with Nvidia/AMD and therefore very fast time to market. Supply problems take away some of that advantage as others have more time to catch up.
I was shocked when I saw next Q guidance and sold immediately as I was already on the fence with the position. In the next second I got doubts because the full year guide was ok. After listening to the call I did not want to buy back my shares. Maybe they will further build out their product lead and have durable high growth. In that case, I hope you grabbed my shares and enjoy the ride .
I’ve been on the fence with this company. I bought a small position a while ago, made a few bucks and sold. I appreciate the comment from @HannesRS that insiders have said that liquid cooling was not a big deal, as I had previously thought this provided a significant competitive advantage.
Along those same lines I’ve become interested in Modine (MOD). They are the primary supplier of air conditioning for data centers (and a host of other applications). The company looks pretty boring, but the stock price is up quite a lot, more than 2x in the last 3 months. I don’t make my decisions based on stock price, but a big run up can get my attention.