SMCI AI Stock Analysis - Super Micro Computer ($SMCI) as an Artificial Intelligence Investment

Want to invest in AI stock SMCI? We discuss Super Micro Computer ($SMCI) and its role in the AI industry. SMCI is an AI company that specializes in putting together racks and servers for artificial intelligence (AI) data centers. We analyze SMCI's strong earnings report and the unlimited demand for its products. We also discuss the valuation of SMCI and calculate a price target based on earnings estimates. Kai pushes the possibility of a market pullback and its impact on SMCI's stock price. We also share views on the overall market and the future of AI investments.

SMCI as an AI Stock - Episode 2 Outline:

0:00 Introduction to SMCI and its Business Model
0:58 James' Take on SMCI
3:12 Unlimited Demand for SMCI's Products
3:22 Discussion on SMCI's Valuation
5:31 Calculating SMCI's Price Target
8:30 Evaluating SMCI's EPS Growth and PE Ratio
10:24 Considering a Potential Pullback in SMCI's Stock Price
13:31 Understanding SMCI's Revenue and Market Position
17:19 The Role of Liquid Cooling in SMCI's Future Growth
21:03 Assessing the Market Conditions and Potential Risks
25:18 Analogy of SMCI's Growth Potential

What do you think of SMCI as an investment in artificial intelligence? Is Super Micro ($SCMI) a top AI stock?

Transcript

James (00:01.868)
Welcome to the investing in intelligence podcast, where we talk about artificial intelligence companies, stocks and trading. I'm James here with my co -host Kai. And today we'll be talking about SMCI super micro computer. I want to remind you that the opinions expressed on this podcast are just that opinions. They should not be taken as specific advice to invest in a particular way. Quick overview of super micro. They put together racks.

They put together servers for artificial intelligence GPUs. So they do a little bit of the accessories, but I think 96%, if I remember correctly of their business is actually just putting together the racks and selling racks. They do plug and play solutions. They provide the AI servers directly to companies that want to use them for whatever they want to use them for. All right, we're going to jump right in. I'm going to talk about my take on SMCI.

Kai, we can hear your take. You can jump in and ask questions anytime. And we'll just kind of go over SMCI here. So I do own SMCI. As my disclosure, I do own SMCI. Kai, do you own any SMCI currently? You don't need to tell us a number. Do you own any? Is it a significant percent of your overall portfolio?

James (01:24.014)
Okay, that's news to me. I currently, I think I have like 11 % of my portfolio in SMCI just because it's gone up so much, not because I started with 11%, but I'm probably gonna keep it at 11%. So my disclosure, I own SMCI, I do not have any trades currently open in SMCI. Kai, do you have any trades open in SMCI?

Okay, all right, so we are in Q3 of SMCI's fiscal year 2024. Their big earnings report was their Q2 earnings report, which was in January. So that's probably the best place to start with the story of SMCI. Before they even reported earnings on the last earnings report, they came out and they told Wall Street that they were gonna...

Report higher than they had expected so they came out and they actually set the bar higher before their earnings report And then even with their earnings report they reported even higher than the higher bar they had set so Their earnings call was pretty much listening to a rock concert. It was unbelievable their earnings call Blew me away probably the the second First or second best earnings call that I've ever heard with maybe the first being in videos Not this past one with the prior Nvidia earnings call

It's shocking to hear a team that has just inundated with business, can't grow fast enough, is supply constrained. There is a reason why the stock has shot up and we'll talk about valuation in a second, but essentially there is no limit to their business right now. There's no limit to the amount of money they can make except for the inputs into their supply and for their ability to put those inputs together into.

racks and sell them. So unlimited demand right now. Anything so far, Kai?

Kai (03:20.365)
Taylor Swift, love song. James, you're writing for an AI.

to check out about Anet risk to networks. This will be a lot more interesting. So James, just getting straight off the circuit, replay what happened back in January. SMCI was trading in the two to 300 range, correct? And just replay what happened for us. You briefly mentioned it, but SMCI is currently at around 11.

I think, way above its 21 day, 50 day EMAs. And its 200 day EMA is somewhere around, I think around 300. So we are drastically past that. So just replay that from January, what went on and what's transpired since then.

James (04:08.364)
Yeah. So looking now, it looks like in early January, it was around the two, the upper two to $300 range. And I actually remember this point in time because I was looking at trading it and a lot of people were trading it. So it had a high short interest and had a high percent short of float. And people were shorting actively shorting this stock thinking that it was already too high in the low three hundreds. So indeed I did hear a lot of commentators come out and say, okay, when they raise guidance and then when they beat the guidance that they raised to.

Definitely there was a short squeeze. There's no doubt there was a short squeeze, but if you look at, so I've got the six month chart here, I'm gonna change to the, okay, like a three month, but I'm gonna be happy with my one month here. It has continued to go up. So a short squeeze looks like a quick spike and then maybe it dies off after that, but that is not what has happened here. So this stock has actually been revalued in light of their exploding business. So there is no.

Kai (04:46.623)
you

Kai (05:01.677)
You think their evaluations fair? You think their evaluations fair?

James (05:04.782)
That's a key question and really investors need to calculate it on their own. So once again, we are in fiscal year 2024 right now. So it looks like the high estimate for, well, I mean, there's a, I see a drastic difference between the high estimate for the rest of this year, which is only like one and a half quarters remaining and next year. So it's almost a little more fair to value it based on next year, since they're already more than halfway through their current year, 2024.

So I'm gonna go ahead and just do, I don't know, Kai, you tell me, what do you think is a reasonable PE? What is a reasonable price to earnings ratio for a massively growing tech company? 30, 40?

Kai (05:43.053)
Well, this massively growing tech company is currently at around a 90p. So it's competitors. So IBM, for example, and Cisco, and just in general, SMCI basically is a global technology company that specializes in market innovation in regards to the cloud, AI, infrastructure development. Is that correct?

James (06:11.438)
I want to make it a lot simpler than that. What I want to say is that they put the GPUs on racks and provide them to companies that want to do AI cloud. Like for example, the two Ms, M and M, that's going to be Meta and Microsoft. Meta and Microsoft are putting together massive GPU clusters. Microsoft obviously is the backbone of chat GPT. So guess who puts together those GPUs on the servers? Well, normally it's super micro.

In certain cases, you may have companies as big as Google that do a little bit of that on their own, but for slightly smaller, I don't even say smaller, because I believe, so they talk about their two biggest companies or their two biggest customers rather. Their two biggest customers, they do not use the name of these customers, but we have every reason to believe their two biggest customers are Microsoft and Meta. And I do want to be fair and I want to be honest and I want to just tell everyone,

that a significant amount of their business comes from these two customers. So 26%, I'm reading now from their earnings call, 26 % of their revenue comes from one customer, 11 % of their revenue comes from a second customer. We have every reason to believe those are probably Meta and Microsoft, but they also say that they have, I'm once again reading from their earnings call, large and growing backlog. So they have unlimited amount of demand for their GPU servers. So,

To answer your question directly, I would just say that they're putting together the servers that everyone needs right now. You cannot directly buy the GPU. Go ahead.

Kai (07:44.493)
Okay so how does that result in EPS growth? I mean so for example three years ago EPS for the years about five, a year after that it's about ten or eleven.

James (07:55.438)
Okay.

Kai (08:00.813)
And this last quarter, it was five. So five times four is about 20 EPS for the year. Their competitors, their PEs are in the 20 to 30 range. Right now SMCI's PE is trading at 90. So, number one, what's the hold on? Number one, what EPS do you expect for this next year? Total EPS, this last quarter's was five. And then what PE are you doing this calculation? Because to me,

James (08:15.438)
Okay, well, let me explain that because...

Kai (08:29.197)
Let's just say the EPS is 20. It all depends on that PE what it's trading at in 2025, the end of this year. So what is James, your PE that you're, cause its competitors are 20 to 30. Do you think it's at a PE of 90? Yeah.

James (08:42.862)
Yeah, so, so 36, I'm using a PE of 36 to calculate their price target. And I do see the trailing, you can't use a trailing PE. The reason you can't use a trailing PE because it uses four quarters and four quarters ago, they weren't making nearly as much money as they're making now. And let me read once again, we made more in one quarter than we did in all of 2021. This is from the earnings call. We made more money in one quarter.

Kai (08:48.831)
you

James (09:11.374)
than we did in all of 2021. So you can't use past results for this company. This is a company that is actively skyrocketing like a space S like a space X rocket into the sky. So you can't really use a TTM PE ratio. You have to use something different. And what I'm using is a number of 36. I think that's a fair forward PE assuming they continue to grow after a year. And I'm using their large estimate, the highest amount of the various analysts who put a,

an estimate of EPS earnings for the coming year. With that, with the highest is 37 .84, you get to a number of 1368 for their price target. So $1 ,400 roughly for a price target after, at the end of 2025 fiscal year, which would be six quarters from now, roughly six quarters from now, we would hope that they would be around a price target of 1400, which I think is reasonable. I hear a lot of people saying, oh, we're going for 3000 in SMCI a few years from now. We don't know exactly what's going to happen a few years from now.

I think it's better to just look at these estimates and say, where are our price targets based on how earnings come in? I think 1 ,400 is definitely reasonable six quarters from now. Does that answer your question?

Kai (10:22.719)
in around a little over $1 ,100. So are you buying SNCI with it?

Kai (10:31.693)
Are we in an SMCI bottle, James?

James (10:35.182)
Okay, so it is trading at 1100. I do not debate the fact that it is trading at 1100. So a significant amount of the future growth over the next six quarters is priced in already. And this is what markets do. So markets try to anticipate what's gonna happen, not just next quarter, next earnings report, but what's gonna happen a year from now.

Kai (10:39.213)
you

Kai (10:46.943)
you

James (10:55.118)
And in this case, a year and a half. So yes, a lot of the potential growth for the next year and a half is already priced into the stock. I don't deny that, which is why I think it's good to look at some of these other smaller companies that haven't shot up as much. If you want to invest in AI, Supermicro has been a big name. And that's part of the reason why it shot up. It's a big name. Everyone's talking about it. It just got added to the S &P 500. So when something gets added to the S &P 500, a lot of funds have to add that stock to their holdings. So there's a lot of reasons why it shot up.

I do think it can hold these price levels. What I mean by that is I think it can hold 75 % of the price where it's at, even if we have a downturn. So I don't see this going below 800. I don't see this going below 800, but.

Kai (11:34.701)
Well a lot of the reason I mean since January I just want to point out for a lot of traders

even for a mini -mon -

Kai (11:48.173)
Prior to January, volume on SMCI was not very high, but after January, and you could look up a particular date, I mean, we're trading to 10 to 30 million in a day. So it is consistently trading 10 to 30 million. That's a huge volume on a company and it shot up from two to 300 to over 1 ,100. What do you expect that's going to drive? So are these orders that are being placed?

for the racks that these GPUs are being put on? Are they gonna remain consistent? Do you expect the EPS to grow over the next four quarters or do you expect it to be in the five to seven range? And for what James was saying, the last EPS, for example, for the quarter was over five. In 2021, its EPS was 5 .3. And so that's what the CEO or the earnings calls alluding to is so in one quarter, they surpass their EPS for a year.

The only thing that I would say to also, so number one, answer that question for me. What do you expect the EPS to stay at five for the next few quarters? Talk about the orders that are being placed and why that will provide consistent revenue. And number three, just give me a sense of the revenue of this company, because the one caution that I would have, the one bare case, so to speak, is that we're not talking tens and billions of revenue here. We're talking in the...

James (13:13.414)
Talk like a p -

Kai (13:15.277)
I mean, we're talking $7 billion in revenue. This is not, well, that's correct, but it's not tens and tens of billions of dollars. And so answer those three questions. So what do you expect the EPS going to be? Do you think that the revenue could be a problem with the evaluation of a PE of 90? And start with those two things for me.

James (13:17.006)
1 .8 billion for a quarter. Yeah.

James (13:31.47)
you

James (13:37.55)
Well, once again, I want to say it's better to look at the forward P, not the trailing P in this particular case. But what you're getting to is the way you want to think about SMCI. You want to think about what is their position in the market? Are they going to continue to grow? Are they going to have competition? What are their margins? Things like that. I feel like that's more important than whether or not the price is at 1100 today or 1300 today. And I want to, I want to read one last quote from the earnings call. The CEO said,

Kai (13:50.765)
you

James (14:05.582)
We expect demand will last for many decades to come. There's no better phrase that an investor can hear than that.

Kai (14:06.399)
you

So to make that sort of statement, they must know the orders are coming in and that the orders will continue. The big debate I have, and we can get into this at a different time, is the end product in regards to this AI and will it continue to drive the orders that are already being driven. And I think we can get into that and then how long that lasts. So basically you expect, what I'm hearing from you is the EPS to continue per quarter because of these already consistent orders being placed.

James (14:40.846)
There's infinite demand.

Kai (14:41.357)
What about the revenue? What about the revenue? And do you think that the forward PE, what you're saying is going to be consistent? 90 PE you think is a realistic evaluation.

James (14:52.622)
Yeah, give me just like one one second to explain just a couple things I think people need to understand about SMCI. So they made 1 .8 billion in the last quarter, but

So the revenue was, okay, no, they sold, let me rephrase that. I said they're wrong. They sold 1 .8 billion of product, but the problem is that they're spending so much to grow, it didn't turn out to 19 billion of profit. So even though their margins are like 17, 18, 19 % or something like that, or sorry, I think 16, 17 % of their margins, that 1 .8 billion should have been 19 billion of revenue, but because they are spending so much to grow,

Kai (15:19.007)
you

James (15:34.702)
that 1 .8 billion of sales didn't turn into the 19 billion that they would have received as profit if they weren't spending so much to grow. They have to spend some money and that's why they just issued equity. So an investor who doesn't fully understand this might look at the fact that they just issued more debt or they just took on more debt and say, hey, this company is still borrowing.

Kai (15:53.581)
you

James (15:57.902)
Like they're making a lot of money, their earnings are growing, why would they be borrowing? Well, they have to grow, because they are number one, there is so much demand for their products that they have a backlog larger than Nvidia's backlog. If you want to think of it in a metaphor, they are Apple computer and Nvidia is the Intel processor that goes into the Apple.

Kai (16:05.581)
you

James (16:22.766)
computer that you buy. So if you think back to back in the day when Apple used to actually put more Intel processors in their computers, you would see on the computer that it says Intel inside or something like that. So Nvidia is actually just making that processor that goes into the server rack. And then Supermicro is actually supplying the server rack that the companies need to run software that you need to run software. So they're the most important. In my opinion, Supermicro is the most important.

Kai (16:42.733)
you

James (16:50.382)
and they only have one competitor, one real competitor, and that's Dell. And Dell is not doing a bad job, I'm not gonna lie. Dell also saw a massive beat on earnings. So there is a competitor in Dell, but Supermicro was ready for the moment when AI hit, Supermicro was ready. They were already doing GPU servers. They've got a new thing called liquid cooling. Okay, and liquid cooling, and this is critical to their future returns and their explosive growth continuing beyond the next six quarters. Liquid cooling allows these GPU clusters to run.

Kai (16:56.401)
you

Kai (17:01.727)
you

Kai (17:11.949)
you

James (17:19.918)
So the next generation of GPUs need liquid cooling. And guess who's the expert in that? Supermicro. So I just don't feel like there's any reason not to own Supermicro. Even though it's at 1100, it's still a good thing.

Kai (17:35.181)
You're like a... You're like a soprano.

week at Arista Networks you're like a base you know it's I feel like your voice level has changed when talking about this company you may have a romantic relationship with Supermicro so you know there's a lot of things working for it I don't know I Supermicro and I would be interested in your take this is a little different take this they build an eight thousand eight hundred

James (17:52.014)
you

Kai (18:04.621)
You think that there's any sort of risk here and how much of potential profit and or revenue is being driven.

James (18:04.686)
Yeah.

Kai (18:16.013)
in regards to the political situation.

James (18:20.43)
Yeah, so it looks like they're in Europe, Asia, and the US and the rest of the world. So the US, I don't have percentages of their makeup of which region. I do see that US revenues increased 139 % on a year over year basis. Asia revenues increased 98 % year over year. Europe revenues only, oh, Europe, okay, Europe revenues increased 51 % quarter over quarter. So Europe is kind of catching up to these other areas.

Kai (18:49.997)
you

James (18:50.126)
So all of these companies are trying to do business, like Broadcom also trying to do business in Japan, Korea, and the US, and also Europe to a certain degree. So Taiwan, I don't believe they're dependent on Taiwan as much as other companies. Like obviously Taiwan Semi is highly dependent on Taiwan, although Taiwan Semi is opening a plant in Japan. I don't think, if your question is whether or not Taiwan is a critical choke point for them,

Kai (18:56.575)
you

Kai (19:19.757)
you

James (19:19.758)
I would say only as much as Taiwan Semi is based in Taiwan, is it a choke point for SMCI? Because SMCI can come, go ahead.

Kai (19:26.893)
Okay, so yeah, so thanks for answering that question. So Dell is a significant competitor or not. And then number two, what...

And then your argument last week, and for those of you that haven't seen our episode for Orissa Networks, check that out, was that James was making the argument that NVIDIA can do everything that Orissa Networks can do, anything you can do, and I can do better. So can NVIDIA just all of a sudden make their own racks and put their GPUs?

James (19:42.608)
you

James (19:59.31)
You know, Nvidia has grown so much, they're doing software now. The reason I would say that I don't think they're going to do that is that they've had a close partnership with SMCI. So SMCI's CEO says very clearly, the reason that we've had such a dynamic, rapid growth from the moment that AI took off is that we had that relationship in place with Nvidia previously. So.

Kai (20:13.453)
you

Kai (20:20.173)
you

James (20:28.11)
It seems there's a symbiotic relationship between SMCI and NVIDIA. And I don't necessarily think NVIDIA has a great reason to endanger that symbiosis right now. So I guess I would say not every company wants to do everything. And if SMCI and Dell are putting these servers together well, I assume that NVIDIA is going to continue to allow them to do that. So I can't, I mean, I think that's actually a very interesting question. I have not heard anyone ask that question, which is why partially it's not on my radar.

partially I think it's a brilliant question. But I don't think Nvidia wants to take every single point along the supply and distribution chain. I don't think they want every single point along that chain. I think they're trying to maximize the points that are viable. They are gonna do custom fabrication, which is a threat to Broadcom, but I don't think they're threatening SMCI right now. That's a great question though, yeah. But we should wrap up.

Kai (21:01.293)
you

Kai (21:18.221)
Yeah. No, no. So my particular opinion and one of the things just in general for investors, especially going long on an investment is volume. So volume has significantly increased with SMCI. And what happens is when you see volume, the buyers are coming into the market. And then when the heat, that stock starts to heat up, so to speak, you'll see hedge fund money and larger fund.

James (21:39.602)
you

Kai (21:47.693)
Funds start to buy the stock as well because they don't want to miss out and so right now since January We've been riding the gravy train of SMCI and so I think was a brilliant movie I mean when it when it went from 200 to 300 to 400 to 500 to go ahead and get on it The question is now is it are we losing steam is the is the fire kindling out so to speak and So I currently don't hold SMCI took profits. It's one of those I took profits fun I plan on holding SMCI in the future, but

James (21:51.982)
So.

Kai (22:17.677)
Would it be a reasonable idea to go ahead and right now I think, because we're transitioning to kind of seeing what we think of the market, we may be experiencing a little profit taking, a little pullback to the 50 day EMAs or the 21 day EMAs. And I stand by my words, I think we're still in a bull market. However, do you expect that to pull back? And what if I would say to you, James, why not just wait until it pulls back to the 21 day or even 50 day EMA and buy some and take some profits and double dips?

James (22:32.814)
you

James (22:46.45)
So neither SMCI nor Nvidia have a great reason to pull back based on the fundamentals of their companies and their underlying business. The bigger issue is what we can get into now. We'll both do a minute on this, but I just think it's a danger in light of the overall market because even though there may be nothing wrong with the stock itself and its valuation in light of future sales, the market itself is looking a little frothy and sketchy right now.

Kai (23:04.543)
you

James (23:15.95)
So we did have this big, big drop in Nvidia where I think people were saying it, it dropped. I think the majority of dropped intra day was like up to 10%, but it finished with a 5 .6 % drop for the day on Friday. So.

Kai (23:33.229)
And we're down after hours, James. I mean, we're down after hours. We'll see what happens tomorrow. But I tend to think what goes up must come down. We are so far extended and above the 21 day and 50 day EMAs. And if you're telling me the price target of SMCI is in the 1300 to 1600 range, it's currently almost there. And so my particular opinion is the price target for SMCI is not 1600. I think it's much higher than that. And so I am going to wait for a poll.

However, I do think we're very extended. I don't think we're in an AI bowl, so to speak. I think this is real. This is one of the reasons why we're doing this podcast. But the price to book ratio of SMCI was 55 back in the last quarter, James. The price to book ratio is astronomical right now. And so we're talking about a company that has $500 billion, $500 million, not.

They do not have a lot of cash. So we'll see what happens. I think it's great. There's a lot of hype around it. Clearly, James is on board the SMCI choo -choo chain here. But we'll find out what happens.

James (24:49.07)
Well, if you'd like to use the metaphor, if you'd like to use a metaphor of a train, what a train needs in order to keep going and even speed up if it's a steam based train is more wood in the furnace to fuel that steam. So what SMCI is doing right now is building more factories. They're increasing their ability to sell more products. And that's why they're a little short on wood to put in the furnace to provide more steam to the stock or the company right now.

But as soon as they get all the wood in the furnace, that train is gonna jump off their fricking tracks and drive straight into the sky.

Kai (25:26.609)
It's gonna grow wings. The steam will become, the pressure will become so high it will lift the train off the tracks. It's an interesting analogy. Please don't judge our intelligence by our analogies of these stocks. James, it's been great to talk with you. I'd be interesting to see regarding this AI bubble. We're both fans of SMCI. I will admit that I did not like its website as much as Arista Networks. And so...

James (25:32.398)
That might be that might be six quarters from now. We don't have a

Kai (25:54.253)
There you go. You know, they need James Gibson. They need, well, they need James Gibson on, you know, website development SMCI. If you're out there, you may go looking for James. He's somewhere around.

James (25:55.47)
Can't judge a book by its cover.

James (26:07.35)
All right, well, thank you so much, Kai, and thanks everyone for listening to our podcast. Please give us a rating, review, like, or comment, and we'll be back in the next episode. You can find all our holdings and trades at investingintel .ai. If your first language is Chinese, Japanese, or Arabic, you can also find our podcast in those languages on YouTube. We'll see you soon, Kai.

Kai (26:13.881)
you

Kai (26:23.629)
you

Kai (26:29.677)
Catch you next week, guys.