Super rally for Super Micro Computer stock

For several years now, the production of microchips has been called the new oil. NVIDIA Corp is one of the mentioned companies in recent weeks. Advanced Micro Devices Inc is also starting its recovery cycle. NVID and AMD stocks both are showing significant growth.

But Super Micro Computer Inc has grown 8 times over the past 12 months and by 180% just since the beginning of the year. Yesterday SMCI stock price fell by allmost 20%.

Is SMCI stock is undervalued or overvalued by now?

Let`s try to find out using our stock valuation system!

At first why we are all talking about this comapny so much? Super Micro Computer, Inc. engages in the distribution and manufacture of information technology solutions and other computer products. The company is headquartered in San Jose, California. The firm provides Silicon Valley-based accelerated compute platforms that are application-optimized server and storage systems for various markets, including enterprise data centers, cloud computing, artificial intelligence, fifth generation (5G) and edge computing. The firm operates in United States, Asia and Europe.

In a few words, Super Micro designs architecture for IT solutions including server racks and storage clusters, and has close ties to Nvidia and AMD.

The company recorded a revenue of $3.6 bln last quarter ended December 2023. Revenue dynamics are impressive, but profits are not. Net income is only approximately $300 mln and net profit margin calculated for the last twelve month is only 8%. Not so high for such an avangard company from information technology sector.

The debt burden of the firm is under control and the managment of the company demonstrates high efficiency with ROE above 30%.

SMCI is quoted near $800 per share and it corresponds to 62 by P/E multiplier. This level is acceptable for IT company, but just in case, it is much more abore average historical valuation! The financials of the business are suposed to grow rapidly in the nearest future.

We find Super Micro Computer overvalued as of the middle of the 1st quarter 2024.

We are waiting for a new report to clarify whether this company really can become the next «big thing» given the extremely weak cash flows of the last quarter. Just look at the cash flow from operating activities for the quarter ended December 2023 and compare them with the same period last year.

Accounts receivable accounted for almost 80% of accrued profit for the last quarter. SMCI is extremely aggressively increasing its invetories, directing more than $1 billion to increase them. Of course, this is explained by the increased demand for the company’s products and the growing market at a galloping pace. but we can state that earnings quality of the company is extremly weak!

So it`s a huge risk for shareholders. In a rapidly changing market environment, the company will have to make every effort to manage its inventories and control cash flows.

We would like to end this articles with the words of Buffett: “You don’t find out who’s been swimming naked until the tide goes out”.

On that note, take care of yourselves and your money.