This AI stock is up 163% this year and Wall Street thinks it could go up another 50%. Is this realistic? | The motley fool

Investors in leading cloud and semiconductor stocks have likely seen big gains this year as the artificial intelligence (AI) revolution sparked by the introduction of ChatGPT last November has begun to translate into blockbuster revenue and profit gains for companies well positioned this spring.

While many relied on the GPU leader Nvidia (NVDA -3.74%)cloud giant Microsoftor more speculative software bets such as C3.aieven a company in the less well-liked server market was a big winner.

Super Microcomputers (SMCI 0.20%) has carved out a very attractive niche in the AI ​​industry and the stock is up 163% in 2023. But what’s even more impressive is that, unlike other tech stocks that were down in 2022, Super Micro is achieving these gains after surging nearly 87% last year — and remember, that was in a year where the Nasdaq Composite (^IXIC) fallen more than 30%!

Though the stock has nearly quintupled in just 18 months, a Wall Street analyst recently upgraded Super Micro by raising its price target to $325, about 50% higher than the stock stands today.

That may sound ridiculous to some, but unlike other AI games that seem hugely expensive, there’s a perfectly reasonable case for Super Micro to meet that goal and even surpass it.

Loop Capital is all-in on SMCI’s “Legos”.

On June 14, Loop Capital analyst Ananda Baruah raised its price target on Super Micro Computers from $200 a share to $325 a share, indicating a gain of about 50% from the current level of the stock. title.

In his note, Baruah said that Loop’s work suggests that “Gen AI’s compute build has both legs and commercial commitment, with Gen AI going 30%-40% of all Hyperscale applications from less 5% today”. Within the generative AI megatrend, Baruah particularly likes Super Micro Computer for its unique “large-scale complexity” model, which Baruah says has at least a 12-24 month lead over the competition.

What is the business model of building blocks? In a recent conference hosted by Rosenblatt Securities, Super Micro founder Charles Liang describes the strategy of building servers as if they were “Lego”, with each component optimized for quality, functionality, cost and integration, which can be formed in a myriad of custom items server projects.

Unlike other server companies that mass-produce off-the-shelf models, customers can optimize Super Micro’s server systems to suit their end application. And with the proliferation of not only artificial intelligence but also 5G, edge computing and the Internet of Things, customers seem to be hungry for customized solutions that can be delivered rapidly at scale.

In fact, Loop had mentioned this large-scale customization benefit in its previous May 24 memo, when it initially raised its price target on the Super Micro to $200 from $150. In that memo, Baruah said that while the ‘AI is the most important and prominent catalyst, “Super Micro’s core value-add is deep server customization that provides differentiated impact for increasingly mission-critical applications, including AI/ML [machine learning]Data Analysis, Strategic Video Streaming, etc.”

A data center full of servers under a blue light.

Super Micro can save AI data centers a lot of money. Image source: Getty Images.

And don’t forget the benefits of green computing

Loop isn’t even the only research firm that’s optimistic about Super Micro’s prospects from here. In early June, Rosenblatt Securities’ Hans Mosesmann began hedging the company with a price target of $300, which implies about 40% upside from current levels.

Mosesmann also noted the mass-customized building block model, but he’s also optimistic about Super Micro’s “green computing” ethos, whereby the company advertises its servers as the most energy-efficient in the industry. . While “green computing” used to be a nice feature to have, in the world of AI it’s much more important. The state-of-the-art chips require huge amounts of electricity to operate, and they also generate large amounts of heat, which requires some way to cool the chips. Since cooling systems require space and electricity in and of themselves, this further increases the electricity and square footage needs of AI data centers.

Mosesmann wrote in his June memo that Super Micro’s new liquid cooling technology can increase rack computing power more than twofold, which Mosesmann describes as “a disruptive dynamic in a power-constrained data center.” .

So while Super Micro isn’t in the business of highly specialized proprietary semiconductor designs, its new server architecture is also helping to boost the computing power of AI data centers, albeit through more indirect means.

A plausible course at $325

Even after quintupling, Super Micro is trading at only about 20 times earnings, and those gains incorporate a weak non-AI server market, as well as supply constraints for AI chips that limited Super Micro’s growth in the recent quarter.

Analysts have consistently underestimated Super Micro’s growth over the past few years and for some reason still expect only modest earnings growth in the year ahead. Yet Charles Liang sees the company grow “at least” 20% in the next fiscal year, starting July 1.

If Super Micro can maintain a 20% earnings growth rate over the next few years, that would equate to a PEG ratio of just 1. It’s actually fair or even cheap for a tech stock, meaning the $ Loop 325 is certainly attainable in the year ahead.

Billy Duberstein has positions in Microsoft and Super Micro Computer and has the following options: short January 2025 $125 put on Super Micro Computer, short January 2025 $130 put on Super Micro Computer, short January 2025 $240 call on Super Micro Computer and short January 2025 $380 calls on Super Micro Computers. His clients can own shares in the companies mentioned. The Motley Fool has positions and recommends Microsoft and Nvidia. The Motley Fool recommends The Motley Fool has a disclosure policy.

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