Super Micro Computer (SMCI): purchase opportunity in service transformation

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Super Micro Computer, Inc. (NASDAQ: SMCI) offers high-performance servers and storage systems covering everything from enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing applications. The company is unique in that it designs and manufactures the majority of its equipment in the United States which it believes represents an advantage over some larger global competitors. As the industry has been challenged by supply chain disruptions and worries about an impending post-pandemic downturn, Super Micro is showing impressive growth trends. The company has seen success with its new range of innovative systems which are in high demand by large customers.

This is a stock that benefits from solid fundamentals, including strong growth prospects and rising profitability. A continued push by the company towards more technology services should be positive for the stock, adding to earnings momentum. We are bullish on the SMCI which looks particularly attractive on the sell side with a good combination of value and upside potential.

Summary of SMCI finances

The company last released its fiscal second quarter results in early February with EPS of $0.88 beating expectations of $0.10. Revenue for the quarter at $1.2 billion was up 41% year-on-year and was also 14% higher than the first quarter result, underscoring operational momentum. Management cited significant orders from new and existing global customers.

SMCI Metrics

Company IR

While gross margin of 14% was down from 16.4% in the second quarter of last year, which at the time benefited from some one-time cost gains, the result was up from 13, 4% from the previous quarter. Profitability was supported by an effort to control costs, as operating expenses as a percentage of sales fell to 9.6% from 11.9% for the period last year. Operating profit at $51 million was up 36% year-over-year and also up 18% in the first six months of the fiscal year.

SMCI Metrics

Company IR

An important theme for the company is a continued transformation from simple server hardware to more integrated computing solutions. The idea here is to bundle more services together, including security and cloud software. It is expected that this category may add a few hundred basis points to overall gross margin in the future. The strategy is already bearing fruit. By verticals, the company is finding momentum in areas such as 5G and telecom customers with more high-tech equipment, which now represent 12% of total revenue, compared to just 5% in the past. during the period last year.

In terms of guidance, management is targeting annual revenue of approximately $4.4 billion, a 24% increase from fiscal 2021. On the earnings side, the company expects GAAP EPS of “at least” $2.77 while the non-GAAP Adjusted EPS forecast of $3.20, if confirmed, would represent a 31% increase from $2.44 a year latest.

Finally, note that Super Micro ended the quarter with $247 million in cash and cash equivalents versus $316 million in debt. Considering EBITDA of $166 million over the past year, we believe the net debt to EBITDA leverage ratio of less than 0.5x reflects a strong overall balance sheet position.

SMCI Share Price Forecast

With a market capitalization of just $1.8 billion, Super Micro Computer stands out as a high-quality small cap with a proven history of being able to compete with much larger competitors. The latest quarterly growth above the industry average suggests the company is gaining market share. Part of that sees its small size as an advantage, being able to react faster to market trends and incorporate new technologies.

Recent product launches, such as its industry-leading edge-to-cloud solutions and what it calls a “revolutionary” universal GPU server system, are examples of its ongoing innovation that help it differentiate themselves in the market for what are sometimes considered commoditized devices. . Longer term, the ongoing transformation to more services with a “complete IT solution” will present cross-selling opportunities for existing customer relationships while expanding the addressable market.

SMCI Chart

Company IR

The attraction here is the outlook for revenue and EPS growth this year at 24% and 31% above 2021, each respectfully, which we believe is based on company-specific execution that goes above and beyond. beyond macro and sectoral trends. Management cites mega-cap tech stalwarts like Cisco Systems Inc (CSCO), Dell Technologies Inc (DELL) and Hewlett Packard Enterprise Co (HPE) as competitors in the company’s annual report.

We note that SMCI trading at a forward P/E multiple of 11x seems like a good value next to this band compared to CSCO at 16x. As SMCI trades at a premium to HPE and DELL closer to 7.5x, SMCI enjoys significantly stronger growth prospects while other companies struggle to move the needle past the single-digit momentum.

Data by YCharts

Final Thoughts

We rate SMCI as a buy with a price target going forward of $45.00, which represents a multiple of 14x on current consensus EPS for FY2022. Our price target was a level at which the stock would was trading as recently as early January and here we believe a string of strong quarterly reports throughout the year will see the stock regain positive momentum. Although a date is yet to be confirmed, the third quarter fiscal report due in early May could be an upside catalyst for the stock if accompanied by positive guidance.

SMCI shares

Looking for Alpha

We view SMCI as simply undervalued given its strong fundamentals and the recent stock sell-off may present a new buying opportunity. The stock is down about 26% from its recent highs and approaching what we consider a high level of technical support around $35.00 per share.

In terms of risk, the company remains exposed to global macro trends. A deterioration in the global macroeconomic environment with the possibility of a slowdown in corporate investment spending would likely represent a bearish headwind for the company. Gross margin will be a key control point going forward.

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