When the coming gains in a stock are “obvious,” watch out. Sure, it’s easy to envision more upside in Super Micro Computer (NASDAQ:SMCI) stock after its epic bull run. However, if short-term traders have already assumed the best-case scenario for Super Micro Computer, then they have already made the easy money and it’s time to take profits.
Some value-conscious investors point to Nvidia (NASDAQ:NVDA) stock’s rally as a sign that the artificial intelligence market is too richly valued. Yet, there’s evidence that Super Micro Computer is actually more overvalued than Nvidia. This doesn’t mean you should short-sell Super Micro Computer stock, but cashing in some chips isn’t a terrible idea.
An Important Development for SMCI Stock
Super Micro Computer has “arrived,” it seems. On March 18, the company officially joined the prestigious S&P 500 large-cap stock index.
Of course, this event isn’t just about prestige. Joining the S&P 500 means that a large number of index-fund holders will, in effect, own SMCI stock. Hence, some people might conclude that being an S&P 500 member will put a “floor” on the Super Micro Computer share price.
How did Super Micro Computer rise from a little-known server developer to an up-and-coming superstar? Without a doubt, the recent hype over AI played a role in Super Micro Computer’s ascendancies.
Just as there’s a strong demand for Nvidia’s AI-compatible graphics processing units, there’s also a demand Super Micro Computer’s AI-enabled servers.
Super Micro Computer can promptly manufacture and ship these servers. According to Rosenblatt Securities analyst Hans Mosesmann, “Super Micro has developed a model that is quick to market.”
Super Micro Computer’s Valuation Concerns
Here’s the problem. The highly efficient market already knows that Super Micro Computer is “very, very quick to market.”
Thus, I agree with Wells Fargo analyst Aaron Rakers’ warning that Super Micro Computer “shares will be highly susceptible to any indications of tempering GPU-based server demand.”
In other words, Super Micro Computer now has the daunting task of living up to the market’s lofty server-demand expectations. And if you had valuation concerns about Nvidia, you’ll be shocked to see how richly valued Super Micro Computer is in 2024.
We can use a commonly cited metric to compare the two companies. Currently, Nvidia’s GAAP trailing 12-month price-to-earnings ratio is 73.63x. For comparison, the sector median P/E ratio is 29.55x.
Meanwhile, Super Micro Computer’s P/E ratio is 83.35x. Now, we can better understand what Rakers meant when he cautioned that SMCI stock is “already discounting solid upside.”
Many stock traders probably aren’t aware that Super Micro Computer is more richly valued than Nvidia. They might not know that Super Micro Computer’s market capitalization was only around $5 billion before November 2022, when OpenAI launched ChatGPT.
Today, Super Micro Computer’s market cap stands at approximately $60 billion. Going forward, it will be quite difficult for Super Micro Computer to maintain this pace of growth.
SMCI Stock: Don’t Make the ‘Obvious’ Trade
You may have recently discovered that Super Micro Computer can quickly assemble and sell its AI-enabled servers. That’s fine, but the market is already fully aware of Super Micro Computer’s advantages and growth potential.
Indeed, investing in Super Micro Computer is such an “obvious” move that an army of short-term traders have already done it. Just compare Super Micro Computer’s valuation and market cap to those of Nvidia, and you’ll see what I’m talking about.
Consequently, the best thing to do right now is to take profits on SMCI stock if you already own it. And if you’re looking to buy it, wait for a share price pullback of at least 25%.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
