Super Micro (NASDAQ:SMCI), which produces and markets hardware used in artificial intelligence (AI), delivered exceptionally strong fiscal third-quarter results on Apr. 30 and increased its full-year guidance. The firm’s Q3 results show that it’s continuing to benefit tremendously from the rapid proliferation of AI.
Moreover, its guidance hike and its very bullish comments indicate that its business will probably continue to post outstanding results for the foreseeable future. Also importantly, the valuation of SMCI stock remains quite low, in light of the firm’s huge profits and tremendous growth.
Despite these points, the Street ran to sell the shares because the firm’s Q3 top line came in a smidgen below analysts’ average estimate. Some large investors are also worried about interest rates staying high. I believe that the Street’s reaction was completely overdone, while the shares’ weakness has created a very good buying opportunity for long-term investors.
Hugely Impressive Results and a Guidance Increase
Sparked by tremendous demand for its AI servers, Super Micro’s revenue tripled last quarter versus the same period a year earlier to $3.85 billion. It’s extremely rare for the top line of a large company to triple in just one year. It’s safe to say that this company’s business is expanding at an exceptionally fast rate.
Moreover, its income from operations jumped to $378.3 million last quarter from $99 million during the same period a year earlier. And its earnings per share came in at $6.65, versus analysts’ average estimate of $5.57.
Super Micro also hiked its top-line outlook for the current quarter to $14.7 billion to $15.1 billion from its previous outlook of $14.3 billion to $14.7 billion.
A Low Valuation and Upbeat Comments
In the wake of the downturn of SMCI stock following its Q3 report, the shares have a forward price-earnings ratio of 24 times. That’s extremely low for a company whose top and bottom lines are growing as quickly as Super Micro’s are. And the hardware maker’s ongoing partnerships with top AI chipmakers Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Intel (NASDAQ:INTC) leave Super Micro well-positioned to continue to benefit tremendously from the ongoing AI revolution.
Super Micro’s innovative cooling techniques significantly reduce data center operators’ power costs. It should also keep it very well-positioned in the rapidly expanding AI hardware market.
During the company’s earnings conference call, CEO Charles Liang noted that the firm’s cooling mechanisms reduce data centers’ energy costs by as much as 40%. It also enables them to “allocate a greater portion of their finite power resources to computing instead of cooling.” As a result, the firm’s products significantly increase data centers’ bottom lines.
Also on the conference call, Liang stated that “we had a strong quarter with more to come.” He added that “this is just the beginning of our long-term high volume…liquid cooling mission.” The CEO even predicted that AI’s rapid expansion would continue “for many quarters, if not many years to come.” He said the firm’s revenue is not being constrained by demand, but by supply.
Taken together, Liang’s comments indicate that the demand for Super Micro’s products is extremely strong. The latter situation is likely to continue for a very long time.
The Street’s Overreaction to a Tiny Revenue Miss
The downturn of SMCI stock seems to have been caused by the fact that its Q3 revenue came in $50 million below analysts’ average estimate of $3.9 billion. Those $50 million represented just 1.3% of the company’s overall sales.
Focusing on such a truly tiny top-line miss and ignoring all of the other very positive aspects of the firm’s report, along with its low valuation, does not make much sense.
On the date of publication, Larry Ramer held long positions in SMCI and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
