The speed with which artificial intelligence (AI) took off last year surprised many investors and sparked a changing of the guard in the rankings of the world’s most valuable companies. Apple was eventually dethroned by Microsoftwhich now tops the list as the only company with a market cap of more than $3 trillion. Nvidiapowered by its industry-leading AI processors, has tripled in size over the past year, ranking third behind Apple at $2.6 trillion. alphabet, AmazonAnd Metaplatforms are all important players in the AI revolution and also members of this auspicious brotherhood.
With a market cap of just $53 billion (as of this writing), it may seem like an exaggeration to claim this Super microcomputer (NASDAQ:SMCI), also called Supermicro, could reach the $1 trillion mark. However, the increasing demand for AI-centric servers and the company’s decades of experience suggest that Supermicro is a dark candidate in the race.
Servants of the stars
While Supermicro has been developing custom server solutions for more than 30 years, the company operated in relative obscurity until the increasing adoption of AI began. It turns out that Supermicro has built quite a pedigree in the harsh spotlight.
Supermicro has built its reputation by providing highly customizable, energy-efficient, liquid-cooled rack servers designed to meet the needs of AI and hyperscale data centers. The company has developed strong working relationships and works hand-in-hand with all leading AI chip manufacturers to ensure its rack servers deliver peak performance while providing energy efficiency and the lowest total cost of ownership in the industry. It has partnerships with Nvidia, modern micro devicesAnd Intelamong others.
This is a winning strategy whose AI-centric servers are flying off the shelves. In the second quarter of fiscal 2024 (ended December 31), Supermicro’s revenue increased 103% year-over-year to $3.7 billion, while earnings per share (EPS) increased 85% from $5.10 rose. Management expects triple-digit growth to continue and is raising its full-year forecast to $14.5 billion, which would represent 104% growth.
Management reports that Supermicro grew five times faster than the industry average over the past 12 months, suggesting that the company is stealing market share from its rivals. Analysts at Northland agree and believe the company has increased its market share to 11%, leaving “plenty of scope for future share gains”.
The Path to $1 Trillion
Supermicro is in an enviable position among AI server manufacturers. The company is small enough to be flexible and has a long history of providing customized server solutions for businesses. Additionally, the strong and enduring relationships that Supermicro has built with chip manufacturers provide insider knowledge and a rich supply of processors used for AI. Despite these advantages and the clear opportunity, a lot still has to happen before Supermicro can join the ranks of trillionaires.
According to Wall Street, Supermicro is expected to generate $14.7 billion in revenue in 2024, which translates to a price-to-sales (P/S) ratio of about 3.6. Assuming the P/E ratio remains constant, Supermicro would need to grow its revenue to about $275 billion per year to support a $1 trillion market cap. To be clear, the company is currently ramping up production to reach $25 billion in annual sales, so sales of that magnitude are still a long way off.
If the company was able to sustain its triple-digit year-over-year growth, Supermicro could reach the $1 trillion market cap threshold by 2031. However, the company is unlikely to maintain its current parabolic growth rate. If we lowered the revenue growth rate assumption to 50%, Supermicro could achieve this possibly reach a market capitalization of $1 trillion by 2035.
There is reason to believe that strong demand for AI-centric servers will continue. BofA Analyst Ruplu Bhattacharya expects the data center market to grow at a compound annual growth rate (CAGR) of 50% over the next three years and that Supermicro’s revenue could grow even faster.
Jensen Huang, CEO of Nvidia, is also optimistic and expects the installed base of data centers to double to $2 trillion in the next four to five years.
If Supermicro capitalizes on even a small portion of this huge opportunity, it will soon join the $1 trillion club.
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1 Unstoppable Stock That Could Join Microsoft, Apple, Nvidia, Alphabet, Amazon and Meta in the $1 Trillion Club was originally published by The Motley Fool