Super Micro Computer’s stock has dropped sharply from its peak and now trades at a considerable discount to its target price. Is this the right time to invest in the stock?

Super Micro Computer (SMCI) stock has demonstrated a lot more volatility than I had hoped for over the past six months. The stock’s rally has stalled and reversed due to slower—albeit still solid—growth, margin compression, and the impact of a short seller’s report. In the last six months, SMCI stock has lost over 40%. Nonetheless, I am trying to look beyond the short-term turbulence. Considering long-term industry trends, it’s hard not to feel bullish about SMCI stock.

Based in San Jose, Super Micro Computer specializes in advanced solutions for data centers, cloud computing, enterprise IT, and big data. Founded in 1993, the company is as old as me—but unlike me, it’s valued at over $25 billion.

Over the last year, SMCI stock has surged along with technology peers like Nvidia (NVDA) as money swept into the AI (artificial intelligence) segment. However, in August, the company faced accusations from a short-selling research company, Hindenburg Research, which raised concerns about its financial practices and transparency. This report has adversely affected the stock’s perception, further aggravated by the decision to postpone its 10-K filing to evaluate internal financial controls.

Nonetheless, J.P. Morgan analysts have described some of Hindenburg’s claims as “tough to verify.” The analysts added that the Hindenburg report lacked specific information about the company’s supposed misconduct.

Why SMCI Stock Might Be Worth Buying Now

One of the major reasons to be bullish on SMCI stock is the company’s resilient business model. AI and data centers are central to Super Micro’s growth, with strong data supporting this trend. The company works closely with NVIDIA (NVDA) to offer a wide range of NVIDIA-certified systems. These systems are designed to provide high performance and efficiency for various needs, from small businesses to large AI training setups using the new NVIDIA H100 and H200 Tensor Core GPUs.

The company currently ships more than 100,000 NVIDIA GPUs (graphics processing units) each quarter, which could lead to $16 billion in annual revenue from these sales alone. These figures reflect a remarkable growth as compared to two years ago.

Despite facing legal uncertainties due to delayed financial filings, recent data indicates strong demand for AI infrastructure, positioning the company to maintain its top-line growth. This demand is likely to mitigate temporary legal pressures and support stock price appreciation.

Liquid Cooling Systems: A Key Driver of Growth

Another bullish aspect of Super Micro is the strong demand for its technology. The company’s innovative liquid cooling systems are crucial for improving energy efficiency in AI-driven data centers, driving significant interest in its products. The company has prioritized the development of energy-efficient solutions and advanced cooling technologies.

In a recent update, the company stated that liquid cooling at the data center scale can greatly decrease the power requirements for a specific cluster size. This reduction of up to 40% in power usage allows for the installation of more AI servers within a limited power capacity. In other words, this technology enables data centers to enhance their computational capacity without a substantial rise in energy consumption. As of early October, the company reported that it had delivered more than 2,000 liquid-cooled racks since June 2024. Moreover, the rapid pace of innovation at Super Micro and within the industry is remarkable, which may help maintain the current buying trend.

While Super Micro traditionally held a small market share, analysts indicate that Super Micro’s share is increasing as the industry shifts towards more energy-efficient products. Most recently, Needham analyst Quinn Bolton highlighted SMCI as a significant beneficiary of the growing demand for liquid cooling infrastructure systems. Bolton has a Buy rating on SMCI stock and predicts a potential upside of 32.3% from current levels.

Earnings Preview and Valuation

Super Micro is set to release its earnings for the first quarter of FY25 next week, and this will be a crucial update for investors. Analysts forecast earnings per share (EPS) of $0.73 on a normalized basis, an increase from $0.63 last quarter. Additionally, revenue is expected to reach $6.46 billion, up by over a billion compared to the previous quarter.

Meanwhile, the stock appears reasonably priced, with a forward price-to-earnings ratio of just 13.7x. At the same time, the forward P/E represents a 43.1% discount to the information technology sector as a whole. Considering the current projected earnings CAGR of 52% over the medium term, the price-to-earnings-to-growth (PEG) ratio stands at a mere 0.26. While I may approach that PEG ratio cautiously, as earnings expectations could change after the company’s internal review, it still suggests that the stock is undervalued.

On TipRanks, SMCI comes in as a Hold based on three Buys, ten Holds, and one Sell ratings assigned by analysts in the past three months. The average SMCI stock price target is $64.22, implying an upside potential of almost 40%.

Super Micro: A Solid Bet on the Future of AI

Despite all the controversy and debate, I’m finding it hard not to be bullish on Super Micro Computer stock right now. The company’s tech demand is growing, and the stock trades at attractive multiples. Furthermore, despite the Hold rating, the stock is trading at a significant discount to its share price target, reflecting a good upside potential.

Super Micro's Future: A Roadmap for Growth

Super Micro has a roadmap for continued growth in the AI market. The company's commitment to innovation, including its focus on liquid cooling, is a major advantage. This, combined with the strong demand for AI infrastructure, makes Super Micro a compelling investment opportunity. However, potential investors should consider the company's recent controversies and the risks associated with the AI market. The company's ability to navigate these challenges will be crucial to its future success.