Shares of Super microcomputer (NASDAQ: SMCI) were in sell-off mode after the company announced third-quarter fiscal 2024 results (for the three months ended March 31) on April 30.
That may seem a bit surprising, given the excellent growth the company achieved during the quarter. More specifically: Super Micro shares fell by more than 11% in pre-market trading on May 1. Investors pressed the panic button because the server manufacturer's turnover was slightly below expectations.
However, a closer look at the company's performance will make it clear that Super Micro's decline is a buying opportunity that smart investors should grab with both hands. Let's look at the reasons why.
Super Micro is growing at a rapid pace
Super Micro's fiscal third-quarter revenue tripled year-over-year to $3.85 billion. However, this value was slightly below the consensus estimate of $3.96 billion. Meanwhile, the company is non-GAAP earnings rose to $6.65 per share, a fourfold jump from the same period last year. Additionally, Super Micro's earnings were significantly higher than the consensus estimate of $5.74 per share.
Super Micro management attributed the company's excellent growth in sales and profits to growing demand for artificial intelligence (AI) servers it produces. CFO David Weigand commented during the latest earnings conference call:
Growth in the third quarter was once again led by AI GPU platforms, which represented more than 50% of revenue among AI GPU customers in both the enterprise and cloud service provider markets. We expect strong growth in the fourth quarter as the supply chain continues to improve thanks to new air and liquid cooled customer designs.
Solid demand for Super Micro's AI servers explains why the company has once again raised its full-year revenue forecast. It now expects to end fiscal 2024 with revenue of $14.9 billion at the midpoint of expectations, up from the previous estimate of $14.5 billion. It's worth noting that Super Micro initially expected fiscal 2024 revenue of $10 billion when it announced its fiscal 2023 results in August last year, meaning it has increased its revenue estimate by almost 50% in nine months.
The company has generated revenues of $9.6 billion in the first nine months of the current fiscal year. So it has almost achieved its original revenue target in just three quarters. The $5.3 billion revenue estimate for the current quarter further reinforces the fact that demand for Super Micro's AI servers will strengthen with a nice sequential increase in revenue.
In fact, the company's revenue guidance for the current quarter exceeds the Street estimate of $4.86 billion. Super Micro expects current quarter earnings of $8.02 per share, well above the consensus estimate of $7.13 per share.
Furthermore, the updated full-year revenue guidance means that revenue is on track to increase by 110% this year. Non-GAAP earnings guidance of $23.69 per share would be double last year's $11.81 per share. All these numbers indicate that selling Super Micro stock based on the small revenue loss may not be a smart move as the company will maintain its glowing growth by upgrading its production capacity.
Investors shouldn't miss the bigger picture
Demand for AI servers will increase at a robust pace in the long term. Last year the market was worth an estimated $12.3 billion. It is expected to achieve annual growth of 26.5% through 2029, generating annual revenues of $50.6 billion by the end of the forecast period. Super Micro Computer's last twelve month revenue of $11.8 billion suggests it is the dominant player in this market.
The good part is that the company is taking steps to ensure it remains the top player in AI servers by upgrading its manufacturing capacity, as management noted during its latest earnings conference call:
Our manufacturing teams are making aggressive progress in modernizing the new facilities in Silicon Valley and scaling our factories in Taiwan and Malaysia. We have secured parts and purchased additional warehouses for our next phase of enterprise and data center operations.
All this explains why Super Micro's earnings growth is expected to remain solid in the coming financial years:
SMCI EPS estimates for the current fiscal year data Ygraphs.
If the company indeed earns $36.82 per share in earnings at the end of fiscal 2026 and is trading at 30 times earnings at that time (in line with Nasdaq-100's earnings multiple), the stock price could rise to $1,104. That indicates a potential increase of 42% from current levels. Super Micro currently trades at just 27 times forward earnings, indicating that investors are currently getting a good deal on the stock.
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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.
Super microcomputer: time to buy this beautiful artificial intelligence (AI) stock as it could rise at least 41% after the latest pullback was originally published by The Motley Fool
