SMCI--Scratching My Head, but Buying Like Mad

Investment Analysis Clubs Saul’s Investing Discussions
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I wouldn’t assume that is a unique feature. And if it is, I would think it would be relatively easy to replicate. For a price…

It’s been suggested that “relationships” are a competitive advantage. Maybe so. I think one advantage for SMCI is a drive to run a lean company and make good money at levels the big bloated legacy companies (ie Dell, HP) are unlikely to go. It also doesn’t hurt that the founder is running the show.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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I happen to be in @PaulWBryant 's camp on this one about SMCI specifically, but I think Bear’s main point is that investing doesn’t boil down to being “convinced” by others to buy a certain stock; The point is to set forth your own strategy and decide which holdings work for you. Clearly SMCI doesn’t fit his portfolio member profile, but it does for others.

I’ll (somewhat tongue-in-cheek) issue another challenge for the SMCI bulls: If your thesis is that SMCI is a winner because of the long-term trend of AI, “NVDA changed everything”, etc., then why would you want to concentrate holdings in a company that has already had an on-trend price run-up, is a cyclical industry (even if the cycle will last up to a decade) and makes widgets?

I can think of several other companies, most familiar with the board, that stand to benefit from the larger AI trend, haven’t yet had the massive run-up of NVDA, SMCI, etc. and are generating recurring revenue:

DDOG
DDOG integrates with OpenAI ChatGPT and this is merely one way that they help organize and optimize AI applications

PLTR
Well documented government and public cyber security relying on AI, see Wedbush’s release today: Palantir is ‘the Messi of AI,’ says analyst who thinks its stock can jump 45% - MarketWatch

AEHR
Recurring revenue for their silicon carbide testing systems

NET
TensorFlow for building and running AI models; Security for chat.openai.com

SNOW
They’ve acquired several companies and have in-house development focus on deep learning and AI in cloud data storage and analysis

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I may not meet your description of SMCI bull… I merely see opportunity for an underpriced stock (as I see it) to come up to a “reasonable price”.

As for your thesis points… I don’t accept the two you mention. I’m just expecting higher fiscal year earnings and “HOPE” management guides toward my expectations. And, of course, if sales and profit growth are expected to continue for “a while”, the current PE is too low.

I find your (perhaps tongue in cheek) comment about why invest in a cyclical industry… even if the cycle will last up to a decade… to be pretty funny. Why? Let’s see a show of hands for how many folks would be happy to have an investment growing 30%-50% (SMCI growth exceeds both of those) for a DECADE?? >>>>

I thought so. Just about everyone. :slight_smile:

Note: I don’t expect to hold SMCI for a decade. Probably will mostly exit my position within a year from now because I expect the share price growth to align with the profit growth a lot sooner than that… and I have other investments lined up for the cash…

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Right on, Rob. And that’s why you have the freedom and good sense to follow your own path, and this includes SMCI! (sounds like).

FWIW I don’t think a cyclical boom that might last a decade is synonymous with an investment growing 30-50% compounded annually during the same time frame.

Overall, though, glad it’s working out for you, and honestly if it works out long term that’s likely great for all the other equities that I mentioned. Like it or not, we’re in “it” (AI) together, birds of a feather, something something :slight_smile: Have a great weekend!

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I don’t get it! Why is SMCI creating so much biased and nearly black & white discussions?

Saul taught us to follow the numbers. The numbers, as posted above, for SMCI are very good, and the guidance over the next couple of quarters looks very strong, and there is a huge possibility that the guidance will be increased. The biggest tech companies are increasing their investments in their data centers (Microsoft, Alphabet, Meta, etc.).

Why? Because a new invention has widened the moat of SMCI, Generative AI. SMCI was an early adaptor of the latest technology and developed hardware, picks, and shovels for utilizing this new invention.

Growth rates seem to be intact over the next couple of quarters. NVDA CEO said, approx. One trillion USD will be invested in data centers over the next few years.

The stock had a huge run-up over the last 12 months (+551%). The stock had a huge run-up over the previous few months YTD (+307,54%). Therefore we have to see if there is still room for growth. Considering the undervaluation of SMCI and the run-up into the appropriate valuation, SMCI seems now to be priced quite reasonably. If growth continues, there will also be room for the stock price.

Yes, SMCI is a story stock (—> Generative AI). But what stock isn’t a story stock in the end? There are and were SAAS stocks, pandemic stocks, cyber security stocks, etc. We bought into these stocks because we believed and are, in part, still believing in their growth stories, and their numbers supported the investment thesis. Some failed, and some are still in our portfolios.

AEHR, one of our latest darlings, is up +350% over the last 12 months and +150% YTD. I don’t see any critical posts about AEHRs huge run-up over the last year.

DDOG, one of our former darlings, is up +53%. My position in DDOG, which I bought on the 12th of April, is up +65%.

IOT is up +123% YTD and +100% over the last year.

Ok, SMCI is up more, but still… in my mind, there are a lot of reasons why SMCI is up and could grow even more. Obviously, I don’t know what the future brings. But I do believe that - as far as the numbers support it - there is still room for growth. We are in the very early innings of generative AI. Will there be competitors and new companies entering the market? Probably yes. But for now, SMCI is one of the early beneficiaries of the technology. I will ride that story as long as the numbers will support that story. I think that is what Saul taught us to do.

So let us have an open discussion about SMCI and all our other great stocks without these biased black & white views, please.

Cheers, and have a great weekend
Nick

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Surprised to see so much uneasiness here about the SMCI investment case on the basis of the stock’s extraordinary run up. It certainly has been other worldly, 300% YTD, 550%, over 12 months, 1500% over 5 years.

It’s good to question the relentless rise in the stock price, which persisted even unfailingly through our most challenging period during the past 20 months or so. I hit upon the stock some 12 months ago while browsing SA’s top quant stocks. It took less than a minute to see that relative to consistency of rapid growth, earnings, valuation, and even momentum by that time, SMCI was the most undervalued stock I had ever seen by a wide margin.

This is no story stock, no flash in the pan, but rather a well led hypergrowth tech hardware company with a CEO proclaiming fearlessly that his company was ahead of his time and was determined to grow the company into one of the giants of the future as AI emerges. He was talking like that long before the ChatGPT moment.

But there were important reasons to be concerned as I checked out the history of the company. I eventually satisfied myself that the highly publicized attacks on the company about 5 years ago were either bogus or satisfactorily resolved. Obviously, investors remained wary of the stock for years despite the fact that customers couldn’t get enough of the products.

The biggest problem was an expose by Bloomberg in 2018 alleging surreptitious traitorous conduct, i.e installing tiny chips in support of China’s spy agenda. SMCI denied, cooperated with the US gov’t, and was officially cleared in a matter of months. Then in 2021, Bloomberg doubled down with similar accusations this time naming Apple (and other tech titans I don’t recall) as a company subject to the China infiltration via SMCI. Another investigation ensued, and Tim Cook called the charges “false, a complete lie.” SMCI was cleared again.

There was also a revenue overstatement during that time span which was corrected by restatement.

The growth of the company was so compelling relative to its valuation that buyers came charging into the stock throughout 2021 and 2022, nearly tripling. Then, in Jan 2023 Spruce Point issued a short report rehashing the company’s past problems. This turned out to be a gift for those of us who wished they owned more. Stock actually dipped back below $70 in February for a few minutes before recovering and then paralleling NVDA since Jensen Huang’s famous Q report in May, and thereafter separating itself ahead of NVDA’s stock performance due to SMCI’s low base and consistent rapid growth.

I chose to sell 1/3 of my shares at $143, and another 1/3 at $270. But it has remained my #2 holding all along that way.

It doesn’t help, I suppose, that the able, visionary, and determined Founder CEO Charles Liang has an accent more unintelligible than Zoom CEO Eric Yuan. Competitors will come along (Dell an HPQ are not them), but for now SMCI is the one getting repeated specific shout outs from Jensen Huang and has remained one of NVDA’s most important partners throughout their existence.

Expect the stock almost has to suffer serious pull backs, but I’m among the believers who see SMCI as a potential $100B. When/if IDK, but it remains a high conviction hold for me.

FWIW. GLTA

https://www.datacenterdynamics.com/en/news/years-later-bloomberg-doubles-down-disputed-supermicro-supply-chain-hack-story/

https://seekingalpha.com/article/4201849-why-you-should-ignore-noise-on-super-micro

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My chief concern with SMCI is that a chassis and circuit card business has lower barriers to entry than other high tech like the major chip vendors. I got the NFLX analogy, and maybe SMCI is so much better that it will dominate the same way. AMZN did. A bookseller became a worldwide vendor of … everything.

BUT … I worked for a server hardware company who invented a new take on servers 20 years ago. It was great for a while, but then major companies saw the same opportunities we did. Our servers used the best CPU chips, the best networking, all that. And so did our competitors. They were mostly giga-cap companies who could squeeze our margins until it became a commodity business with the whole industry making similar products. Our only remaining “magic juice” was the software that controlled rooms full of servers at once. Thus my concern over barriers to entry.

I am long SMCI, but at a more conservative allocation than NVDA.

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