Super Micro Computer (NASDAQ:SMCI) stock has surged nearly tenfold over the past year.
Right now, shares are holding steady, but to a growing number of market participants, a SMCI stock is a bubble stock just ready to pop.
In the views of the bears, shares in this AI infrastructure company are at high risk of big declines because of growth deceleration risk, for one.
Also, there’s a high perceived risk that the company does not have as strong of a economic moat as other AI stocks.
Yet while those critical of SMCI are free to make and express their own opinions of this top-performance generative AI play, we believe the bear case currently laid out is deeply flawed.
Moreover, not only is this stock not on the verge of a collapse. Another big rally may be just around the corner.
SMCI Stock and the Market’s Top Two Concerns
Right now, you could say that the market has mixed sentiment about AI stocks overall. Investors are again concerned that future growth has been overly priced into names in this fast-growing sector.
However, as hinted above, there are growing “bubble trouble” worries for SMCI stock in particular.
While there are concerns that the AI sector’s current rapid pace of growth will decelerate, these concerns are more pronounced when it comes to this company.
Super Micro Computer, a server systems builder, has benefited greatly for demand for such systems. End-users have been buying them hand-over-fist, as they build out the capacity for generative AI training and inference.
In time, this buildout could slow down. Unlike with AI chip companies, which could replace slowing demand growth in this area with growth in areas like AI-PCs, data center-focused SMCI may not have that advantage.
Irrespective of future demand uncertainty, SMCI bears also note that, while previously behind, competition from other server builders is heating up.
This could impact both future growth and margins. Add in SMCI’s pricey forward earnings multiple of 46, and it’s easy to see why the skeptics say it’s “priced for perfection.”
Why the Bear Case Remains Deeply Flawed
Admittedly, the bear case for SMCI stock is fairly substantive. Rather than merely stating shares are overvalued, the bears provide multiple arguments to make their case. Yet while the bear case is far from shallow, make no mistake.
At risk of sounding like a broken record, we once again say that the bear case is deeply flawed. As stated in our prior coverage of Super Micro Computer, concerns about AI server demand slowing down represent an overreaction.
Per forecasts, annual revenue for the AI server market in 2027 is expected to grow to $200 billion. That’s a more-than fivefold increase compared to the $39 billion in AI server revenue for 2023.
With this level of continued robust demand, it’s hard to see a massive growth slowing being just around the corner.
As for competition, the bears are once more making a mountain out of a molehill. Yes, big names in the server space are starting to capitalize on the generative AI growth trend.
However, in a recent bullish research note from JP Morgan’s Samik Chatterjee, the analyst noted that Super Micro’s market leadership is expected to continue. Key advantages like a fast time to market are likely to persist.
Bottom Line: Still a Buy at $1000 Per Share
SMCI’s current four-digit price may suggest shares have peaked in price. However, make no mistake. Loftier price levels remain within reach. Super Micro Computer’s above-mentioned strengths point to future fiscal results meeting, if not beating, expectations.
Per sell-side forecasts, SMCI’s earnings could top $30 per share next fiscal year (ending June 2025). If AI server sector growth stays strong, this stock’s value will rise with earnings.
While this suggests far less rapid gains from here, these prospects still suggest strong gains lie ahead. Until the competition begins to chip away at the company’s competitive edge, the bull case will stay intact.
With this, there’s a clear takeaway. SMCI stock remains a solid buy, at $1000 per share.
SMCI stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in SMCI. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
