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Super Micro Computer (SMCI 7.72%), more commonly known as "Supermicro," has been one of the market's hottest artificial intelligence (AI) stocks. Its shares have soared nearly 400% over the past 12 months as it dazzled the bulls with its rapid growth.

But is it too late to hop aboard the bullish bandwagon after those massive gains? Let's review Supermicro's business model, its growth rates, and its valuations to decide.

Image source: Getty Images.

Supermicro sells high-end servers to more than 1,000 customers in over 100 countries. According to Enlyft, nearly two-thirds of its customers are small-to-medium sized businesses. It was founded three decades ago, but a recent partnership with Nvidiato produce pre-built AI servers lit a raging fire under its stock.

The market's soaring interest in AI technologies, which was driven by the rise of generative AI platforms like OpenAI's ChatGPT, caused Supermicro's server sales to skyrocket over the past two years. Its revenue only rose 7% in fiscal 2021 (which ended in June 2021), but jumped 46% in fiscal 2022 and 37% in fiscal 2023. Its adjusted net income dipped 9% in fiscal 2021, but surged 129% in fiscal 2022 and 116% in fiscal 2023.

For fiscal 2024, Supermicro expects its revenue to rise 33% to 47%, while analysts expect its adjusted earnings per share (EPS) to grow 42%. CEO Charles Liang said it was still seeing "unprecedented demand for AI and other advanced applications requiring optimized rack-scale solutions," and was in a "great position to continue our growth momentum given our record new design wins, customers, and backlog for our best-in-class rack-scale Total AI & IT Solutions."

The bulls believe Supermicro will continue to grow with the broader AI market, which Precedence Research estimates will expand at a compound annual growth rate (CAGR) of 19% from 2023 to 2032. If Supermicro merely matches that growth rate, its annual revenue could jump from $7.1 billion in fiscal 2023 to $34 billion in fiscal 2032.

The bulls also believe Supermicro will continue to expand its market share against its two larger rivals -- Dell Technologiesand Hewlett Packard Enterprise-- in the AI server market. Northland Capital Markets analyst Nehal Chokshi estimates that Supermicro more than doubled its share of AI server market sequentially from 7% in its fiscal third quarter to 17% in its fiscal fourth quarter. Charles Liang also said the company was "pretty confident" it could "continue to gain market share" during its fourth-quarter conference call in early August.

The bears will argue that Supermicro is really just a legacy server maker that grew its revenue at a less impressive CAGR of 10% from fiscal 2016 and fiscal 2021 and then hitched a ride on Nvidia's coattails over the past two years. Nvidia is also working with Dell, HPE, and other enterprise server makers, so Supermicro's growth could abruptly slow down once those tech giants roll out more pre-built AI servers. Supermicro's insiders have also sold about 24 times as many shares as they bought over the past 12 months, so its near-term growth potential might be limited.

With a stock price of about $290 and an enterprise value of $14.1 billion, Supermicro still looks surprisingly cheap at 17 times forward earnings and 1.4 times this year's sales. It's valued more richly than Dell or HPE, which trade at 10 and 8 times forward earnings, respectively, but it's also growing at a much faster rate than either tech giant. Supermicro still looks a lot cheaper than Nvidia, which is growing faster but trades at 28 times forward earnings and 19 times this year's sales.

Those reasonable valuations, along with the fact that this stock has already pulled back about 20% from its record high of $353.29 on Aug. 7, suggest it isn't too late for investors to buy Supermicro as a long-term bet on the secular growth of the AI market. Its moat certainly isn't as wide as Nvidia's, but it could still have plenty of room to run as more companies -- especially small-to-medium sized businesses -- install more dedicated servers to process complex AI tasks.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.

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Is It Too Late to Buy Super Micro Computer Stock? - The Motley Fool