Server and storage system manufacturer Super Micro Computer (NASDAQ: SMCI) has surged from an under-followed value stock to a top pick among investors betting on artificial intelligence (AI). The stock soared nearly 250% in 2023.
Despite its recent success, there are three key reasons why I’m hesitant about investing in Super Micro once again.
A Crowded Market
Super Micro’s rise is due in part to the burgeoning interest in generative AI. It has seen an increase in demand from chip companies like Nvidia (NASDAQ: NVDA), AMD (NASDAQ: AMD), and Intel (NASDAQ: INTC), utilizing its servers to power AI applications. This demand has also propelled its revenues, which are projected to exceed $10 billion for 2024. However, Super Micro faces stiff competition from companies including Cisco Systems, Dell Technologies, and Hewlett Packard Enterprise, as well as emerging players from Asia, such as Foxconn and Inspur. While Super Micro has stood out as a beneficiary of the AI surge, I remain wary of its prospects in a fiercely competitive market.
Dependency on Partners
Despite its anticipated growth, Super Micro’s attraction lies primarily in its comparatively low valuation. Its current price-earnings ratio of 26 is lower than that of Nvidia and AMD. However, this relative value is derived from its reliance on the successes of its semiconductor partners. As a result, Super Micro’s future hinges on the performance of companies like Nvidia and AMD, making it a speculative play on their fortunes rather than a stand-alone growth story. This dependency raises red flags for potential investors.
Lack of Competitive Differentiation
Super Micro’s financial filings acknowledge its limited ability to fend off competitors and protect its intellectual property. While the company has its unique methods for designing enterprise computing and storage systems, these processes are not heavily patented or protected. This lack of competitive differentiation, combined with the susceptibility to intellectual property claims and litigation, undermines the long-term investment appeal of Super Micro in the fast-evolving AI and broader IT landscape. With these factors in mind, I’m cautious about embracing Super Micro as a sound investment in the AI era.
An Investor’s Perspective on Super Micro Computer’s Prospects in 2024
Passing on Super Micro in the New Year
Super Micro Computer, Inc. is facing a cautious investor in the form of one who already holds considerable shares in well-established entities such as Nvidia, AMD, and data center design leader Arista Networks. For this investor, the additional shares in Super Micro offer little in the way of diversification.
Cognizant of the hype surrounding Super Micro as we enter 2024, it is acknowledged that many are banking on the company to reap significant benefits from the AI trend. However, this particular investor has decided to forego the opportunity to invest in Super Micro once again.
A Word of Caution
Before diving into the auspicious world of Super Micro Computer stocks, it’s prudent to pause and consider an unbiased perspective. The Motley Fool Stock Advisor team has highlighted what they deem the 10 most promising stocks for investment. It’s essential to note that, according to the Stock Advisor, Super Micro Computer did not make the cut.
The 10 selected stocks are forecasted to yield substantial returns in the years to come. The Stock Advisor furnishes investors with a coherent investment strategy, inclusive of portfolio-building guidance. Additionally, consistent updates feature analysis and two fresh stock picks monthly. Remarkably, the Stock Advisor service has outperformed the S&P 500’s returns by over triple since 2002.
Invest Wisely
Market wisdom lies in scrutinizing the market terrain before taking the plunge. Nevertheless, investors are well advised to seek counsel from reliable sources and exercise due diligence. Whether Super Micro Computer will navigate the tumultuous waters of 2024 to burgeon into a profitable investment opportunity remains to be seen.
[Editor’s Note: Nicholas Rossolillo and clients hold stakes in Advanced Micro Devices, Arista Networks, and Nvidia. The Motley Fool has positions in and endorses Advanced Micro Devices, Arista Networks, Cisco Systems, and Nvidia. The Motley Fool recommends Intel and Super Micro Computer and advises options such as long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool adheres to a disclosure policy.]