A followup from my reply in this thread: SentinelOne - New article by Bert Hochfeld - #6 by jonwayne235
For those who hadn’t heard of SMCI (like myself until days ago), Supermicro provides servers and storage systems for markets such as data centers, cloud computing, AI, edge computing etc. This is a hardware and commodity like business.
They did 6.57B in TTM revenue, 10.62 EPS and currently at PE 15. Current market cap of about 9B.
They have solid guidance on next year’s 20% growth (fiscal 2023 ends next month), per their latest earnings:
…continue to expect our fiscal year 2024 revenue to be at least 20% year-over-year growth, and we are accelerating to reach our mid-to-long-term growth objectives of $20 billion per year….
Supermicro competes with Dell, IBM, and Hewlett Packard Enterprise.
But they are also just as deeply embedded with the big chip makers and have many big customer clients (META has been long speculated to be a big customer)
From their latest earnings call, May 2:
…record pace of GPU leading-edge design wins with growing back order, including winning at least 2 new global top 20 customers
…key partners including NVIDIA, Intel, AMD…"
In fact, even AMD’s CEO specifically mentioned Supermicro in their last earnings call among the other big name competitors: “For the enterprise, Dell, HPE, Lenovo, Super Micro and other leading providers entered production on new general server platforms that complement their existing third-gen EPYC platforms.”
(I’m just emphasizing that Supermicro is a real player in the industry- NOT a puny company just starting out- SMCI was founded in 1993)
SMCI attempts to differentiate itself by focusing on high end, high performance, high efficiency servers. In the current AI hype environment, this is turning out to actually be a key advantage. Power efficient/money saving products, top of the line hardware servers and fast time to market has allowed SMCI to gain share. Customers today want their servers made quickly.
From their latest earnings call:
With applications like ChatGPT that heavily count on large language models, LLM and generative AI, the state of AI infrastructure business has grown rapidly. This AI momentum has benefited Super Micro greatly as we are deploying many of the world’s leading and large-scale GPU clusters….AI, Storage, on-prem Cloud, Embedded and 5G Edge are all verticals we see the potential to greatly increase our TAM.
Having high power efficiency and air/liquid thermal expertise has become one of our key differentiators of success.
Provided there are no supply constraints, we can design, build, validate full systems and deliver turn-key rack level solutions to customers within a few weeks of placing an order instead of months from competitors…we are on track to support up to 4,000 racks per month of global manufacturing capability and capacity by the calendar year end. We are doing so by efficiently taking market share in the new and fastest growing markets.
Indeed, AI has fundamentally driven their business in the past months: servers made specifically for AI, increased to 29% of total revenues, up from 20% in the quarter prior.
Q3 results were driven by our high-growth AI/GPU and rack-scale solutions which represented approximately 29% of our total revenues and we expect significant, future growth. An existing cloud service provider customer represented more than 10% of revenues for the first time.
Some other very positive tidbits:
1.) SMCI insider buying occurred on May 10 and May 11, 2023. Very interesting that they purchased at $133/share each time….and that was done AFTER share price exploded from May 2’s report (from $104 to $133.95 in a single day!!!)
2.) SMCI has also bought back their own shares in the past quarter, indicating they felt they were VERY intrinsically undervalued at the $100 share price: Stock repurchases in Q3 of 150M dollars (1.55 million shares)
Please note that this is pretty significant. Insiders hold 13% of outstanding shares, there are currently only 56 million shares, and only 40ish million shares float- so this stock is prone to volatile squeezes up in price if investors and institutions want to accumulate and hold. Which has been clearly demonstrated by its rocketship price increases in the last several days.
Even an analyst pointed out the buyback during the May 2 call!
Very impressive buyback rate of $150 million in a quarter, $100 a share. So a very strong statement that the shares are attractive prices. And nice to see that backed up with the $10.5 to $11 share fiscal year '23 guidance.
3.) My opinion is this company remains severely undervalued to its peers on a relative comparison. SMCI is forecasting growth of 30% (ending June 2023 quarter) and continues to reiterate at least 20% growth in fiscal 2024 and beyond. Their “mid to long term” target is $20B in revenue.
SMCI has a PE of 15
HPE (hewlett packard) has a PE 22 and grew 12% YoY last quarter.
DELL has a PE of 14, but forecasted to grow only 1.5% a year the next 3 years.
If you ask me…I wouldn’t be surprised to see SMCI reprice to a PE of 22 or higher before their next earnings release.
The biggest NEGATIVES to this company:
It should be emphasized again that this is a nonrecurring revenue hardware business. They can encounter supply chain problems, which they did in the latest quarter, but they claim it has been largely resolved, and were optimistic on Q4 guidance:
Fiscal Q3, 2023 revenues were $1.28 billion, down 5% year-over-year and down 29% quarter-over-quarter which was below our initial guidance range of $1.42 billion to $1.52 billion. The shortfall was primarily due to key new component shortages for Super Micro’s new generation server platforms which have been mostly resolved to date.
….delivering Q4 revenues in the range of $1.7 billion to $1.9 billion. If supply conditions improve sooner, we expect to be above that range, even some economical headwind is still ahead.
But it is important to note that in the Q/A, it is demand that is definitely NOT the key problem, even in this macro slowdown:
There was a shift – there was a dramatic shift toward new AI solutions… And so therefore, it was larger than anyone expected. And so the parts availability constrained the amount of shipments that we could do. Obviously, we anticipated a slower quarter because the third quarter is seasonally slower. And we also mentioned – you’re correct, we also mentioned some customers that tapped their brakes and moved out to Q. But it was really the component shortages that hit us this quarter.
And their gross margins are not high:
The Q3 non-GAAP gross margin was 17.7%, this was down 110 basis points quarter-over-quarter and up 210 basis points year-over-year. The decline in the non-GAAP gross margin was due to our efforts to gain market share in the rapidly growing AI server platform market with aggressive pricing targeting strategic large enterprises, data center and CSP customers.