When buying into artificial intelligence stocks, investors tend to gravitate toward names such as Nvidia and Advanced Micro Devices . But there’s another little-known AI play that has been soaring alongside those chipmakers over the past year with long-term potential. Super Micro Computer may trail primary AI plays in market cap and size, but that hasn’t stopped investors from piling into the stock in recent months. Shares of the roughly $51 billion server company have surged a whopping 790% year over year, as investors scoop up the under-the-radar AI play. The stock jumped 246% in 2023 and is already up 220% two months into 2024. SMCI YTD mountain Super Micro Computer shares year to date Super Micro Computer “is no household name, particularly not a year ago,” said Harvest Portfolio Management co-chief Paul Meeks, who started buying the stock around that time. “People didn’t see it coming.” Wall Street’s continuing to bet big on the long-term trajectory for the stock even after its drastic price surge, but that hasn’t stopped some investors from turning cautious in the near-term. “Longer term, it’s going to follow the trends of innovation in the space,” said Brian Vendig, president at MJP Wealth Advisors. “Short-term, because we’ve seen an increase in stock price, and this is a stock with a price-to-earnings ratio greater than 60 on a forward PE perspective, it makes sense to monitor.” Here’s a breakdown of how Super Micro Computer got to this point, and where investors and analysts expect it to go. What to know about Super Micro Computer Creating servers isn’t a new objective for the California-based company. In fact, Super Micro Computer has been building these tools long before the AI craze struck Wall Street. Over its 30-year history, the company’s steadily built customer relationships with semiconductor majors — such as Nvidia, AMD and Intel — to integrate accelerators. These unions helped the company attain a “first-mover advantage” within optimized AI hardware, said CFRA Research analyst Shreya Gheewala. SMCI 1Y mountain Super Micro shares over the past year “SMCI’s foresight to tailor its servers to AI workloads years ago is paying off tremendously today, putting it in the right place at the right time,” she said. “Its partnerships and customer trust in its solutions give SMCI pole position as AI and accelerated computing ramp up.” The company’s carved out a unique position in the market, but that hasn’t stopped investors from contemplating its next leg of growth. Some on the Street worry that once the initial demand for servers in the buildout of AI is met, the need for Super Micro’s tools could dry up. Wedbush Securities analyst Matt Bryson is one of many investors that views liquid cooling as that potential second act for the high flyer as companies hunt for solutions to fuel power-hungry artificial intelligence models. “There are numerous companies that believe they are advantaged in liquid cooling,” he said, noting that Super Micro hasn’t yet claimed the premiere spot in the market. “It’s a time-will-tell type of setup.” Justifying the recent stock surge Wall Street’s grown more optimistic on Super Micro in recent months, but not everyone’s jumped headfirst into the craze. Sylvia Jablonski is one of those investors that’s held off on buying shares. The CEO of Defiance ETFs doesn’t own the stock in the funds she manages but favors its strong moat and solid financials. She cited a “frothy” runup in its multiple among the reasons for refraining from scooping up shares. When looking at price-to-earnings multiple, Super Micro Computer trades at 33 times on a forward basis. That’s a slight premium to Nvidia, which trades at 32 times forward earnings. The multiple hovers below that of Advanced Micro Devices at nearly 50 times, but has more than doubled from a little over 15 times at the start of 2024. “Its price could be warranted if it really does become the leader of the liquid cooling system, but I need to be convinced that there isn’t another alternative,” Jablonski said, adding that investors should consider using pullbacks as buying opportunities. Other shareholders such as Vendig have opted to take a breather on buying shares until the next earnings call. “There’s concern around will this demand continue for purchases,” he said, cautioning new investors from building a position. “It makes sense to hear a little bit more from the company on the net earnings outlook to see if that demand is going to continue to hold.” SMCI 1M mountain Super Micro shares over the last months Vendig initially scooped up shares over the last year as an AI bet outside megacap technology and views the recent sharp move in shares as justified given the future profit expectations in the AI space. To be sure, owning Super Micro isn’t for the risk averse. The stock has experienced numerous volatile moves and selloffs, shedding 20% on Feb. 16 alone. It also tends to trade in tandem with the broader semiconductor industry and, more importantly, Nvidia. Along with valuation concerns, Wedbush’s Bryson cited demand fears among the reasons for his hold rating. He worries that the need for Super Micro’s products will slow once adequate supply reaches the market. Those headwinds may not hit until 2025 but could hurt the stock if Super Micro fails to differentiate itself. “Super Micro was in the right place at the right time when generative AI took off, there really wasn’t a competitor,” he said. “They’ve done a great job establishing themselves, or rebranding themselves, but over time, this isn’t going to be a one-player market.”
