Despite Super Micro's 'AI Winner' Status, Goldman is Cautious About the Stock

Goldman Sachs analyst Michael Ng views Super Micro Computer Inc. as an established "AI winner," but cautions against an immediate purchase, given the stock's remarkable surge of nearly 1,000% since the beginning of 2023. Ng initiated coverage of Super Micro's stock (SMCI) with a neutral rating and a target price of $941 on Monday, emphasizing the perceived "fair valuation" after the substantial upswing.

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Drawing parallels with Nvidia Corp., Ng notes that Super Micro has mirrored its revenue growth and witnessed an inflection in earnings power over the past two years. However, the stock's current multiple, standing at 32 times forward estimates for earnings per share, leads Ng to believe that it is now "fairly valued" and aligns with the valuations of other AI enablers.

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Ng acknowledges Super Micro's advantageous position to meet the demand for artificial intelligence infrastructure from cloud service providers in the future. He recognizes the company's unique speed to market capabilities, positioning it attractively for AI-related demand. Despite this, Ng anticipates increased competition in the market, particularly from larger vendors like Dell Technologies Inc. and Cisco Systems Inc., which, although having an enterprise focus, have entered the AI solutions market.

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The analyst suggests that Super Micro's recent spike in market share may normalize lower as competition intensifies. While applauding the expansion in Super Micro's operating margins over the past two years, Ng attributes this growth to factors such as diversified production, revenue acceleration, and gross-margin expansion. However, he also warns that margins on gross profit and earnings before interest and taxes could "normalize lower" as Super Micro concentrates on gaining market share through more price-competitive offerings.

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Despite the measured tone of Goldman's analysis, Super Micro's stock demonstrated resilience, advancing by 23% in Monday morning trading. This positive momentum follows the late Friday announcement that the company will be included as a component in the S&P 500, indicating investor optimism and confidence in Super Micro's future prospects.

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