To make their shares more affordable and liquid, companies have often implemented stock splits. Stock splits increase the number of shares outstanding, but don't change the underlying value or fundamentals of the company. Nevertheless, stock splits are often associated with positive price action in the shares.

Recently, thanks to the searing rally in artificial intelligence (AI) and semiconductor stocks, some high-profile companies have opted for stock splits, including Nvidia (NVDA), Broadcom (AVGO), and Lam Research (LRCX).

One potential addition to this list, according to rising speculation, could be Super Micro Computer (SMCI), the Silicon Valley-based designer, developer, manufacturer, and seller of energy-efficient, high-performance server solutions based on the x86 architecture.

Fueled by the demand for its full rack scale solutions, SMCI stock has soared more than 4,000% over the past five years, but demand for the shares continues to rise. In 2024, the stock is up 185.7% on a YTD basis to lead the S&P 500 Index ($SPX) higher. After starting the year as a Russell 2000 Index (RUT) component, SMCI now commands a market cap of $45.4 billion, and trades at a share price north of $800.

So, what's driving the massive growth for SMCI? Let's have a closer look.

Thriving in a High-Growth Market

The AI server market is expected to reach a staggering $177.4 billion by 2032, reflecting a compound annual growth rate (CAGR) of 18% between 2024 and 2032. This growth is fueled by the ever-increasing demand for data storage capacity in data centers, with IDC predicting an 18.5% CAGR for data center storage from 10.1 zettabytes (ZB) in 2023 to 21.0 ZB in 2027, largely driven by AI. 

Super Micro is well-positioned to capture a significant share of this market, with Bank of America (BAC) analysts expecting the company's share to reach around 17% by 2026, up from 10% in 2023.

SMCI Hikes Revenue Guidance

Super Micro has grown rapidly over the years, as evidenced by its recent addition to the S&P 500. While its revenues have grown at a CAGR of 24.13% over the past 10 years, EPS has expanded at a CAGR of 36.70% over the same period.

In its fiscal Q3 of 2024, Super Micro reported net sales of $3.85 billion, more than triple the previous year's revenue of $1.28 billion. Adjusted EPS jumped 329% over the same period to $6.65, comfortably outpacing the consensus estimate of $5.75. Super Micro's EPS have topped expectations in four of the past five quarters.

SMCI closed the third quarter with a cash and equivalents balance of $2.11 billion, well above its short-term and long-term debt levels of $81.56 million and $85.65 million, respectively.

For the fiscal year ending in June 2024, the company raised its revenue guidance to a range of $14.7 billion to $15.1 billion. Super Micro will report its next quarterly earnings on Aug. 13.

Super Micro's Competitive Edge

Super Micro's growth over the years is a testament to its capability to customize its server offerings according to its customers' needs. This gives Super Micro a competitive advantage, as the complexity of putting together many different components in a configuration for a specific application under time constraints is high enough to limit competition. 

The company can do this because of its modular approach, which involves the use of pre-designed, compatible components that can be easily mixed and matched to create custom configurations using the latest technology. This results in rapid turnaround times, from first receiving the order to delivering the final product.

Super Micro's strong relationships with key Silicon Valley component manufacturers provides a significant advantage. They collaborate closely with industry leaders like Nvidia to integrate cutting-edge AI chipsets, such as the recently announced Nvidia GH200 Grace Hopper superchips, into their server solutions. This positions Super Micro for early market entry with these powerful new technologies. Furthermore, Super Micro partners with other HPC leaders like AMD (AMD) and Intel (INTC), ensuring compatibility with a wide range of AI accelerators.

SMCI continues to partner with Big Tech leaders, as it was recently revealed by Tesla (TSLA) CEO Elon Musk that Super Micro, along with Dell (DELL), would provide servers for the supercomputer that his artificial intelligence startup, xAI, is building.

Liquid Cooling Adoption Set to Surge

SMCI's sustainable growth efforts also position it well for the future. It was one of the first companies to use liquid cooling in servers, which it promotes as a green computing initiative. For the same computing power, liquid-cooling servers take up less space than air-cooled servers, reducing the real estate footprint of the servers, and effectively reducing capex if the customer owns the land containing the data center facility. 

Notably, the heat generated by the chips in AI servers has increased by over 100%, and is expected to increase by another 100% within 2 to 3 years. Super Micro's technology circulates cold liquid over a plate above the chip, reducing energy use by approximately 40% compared to traditional air cooling methods.

Super Micro is a leader in direct liquid cooling technology for data centers, and Bank of America projects the company is on pace to reach a production capacity of 2,000 directly liquid-cooled server racks per month by June's end. Super Micro anticipates rapid adoption of its liquid cooling technology, which it expects to include in 30% of the racks it ships next year. Given the current low adoption rate of just 1%, this presents a significant opportunity for Super Micro to capture market share and solidify its leadership position.

How SMCI Benefits From AI Expansion

Super Micro operates in a market that is poised for a massive boom in the coming years, thanks to AI. Although Super Micro's overall market share is smaller compared to its larger peers like HP (HPE) and Dell, it invests more in R&D as a part of its revenues (4%-6%) than its bigger competitors, who are closer to 2-5%. 

Plus, to compete with the likes of HP and Dell, Super Micro design their servers to be compatible with a wide range of components and software from various vendors. This flexibility empowers customers to choose components that best suit their needs and potentially achieve lower costs compared to Dell or HPE offerings.

Coupled with its AI expertise and speed to market, that should help SMCI build its market share as the industry expands. As a relatively small but rapidly growing pure-play provider in the burgeoning data center market, Super Micro is expected to emerge as a key beneficiary of this megatrend.

Additionally, Super Micro management has said that it sees sovereign AI - the use of AI by governments and public entities - as a potential future growth driver that's not fully reflected in current market projections. CFO David Weigand recently highlighted increasing investments in AI from “both sovereigns as well as other enterprises in EMEA, as well as Europe,” suggesting a coming wave of demand over the next year. This trend could fuel significant growth for Super Micro in the AI server market.

What's the Growth Forecast For SMCI?

Looking ahead, Super Micro's growth forecasts are strong. Analysts are expecting the company's forward revenue growth around 65.71%, compared to the tech sector median of 6.61%. Likewise, operating profit and EPS growth are pegged at 88.79% and 82.70%, towering over the sector medians of 6.65% and 7%, respectively.

Overall, earnings are estimated to grow 122.45% in the current fourth quarter, ending in June, and 94.38% in FY 2024.

Analysts Say SMCI Stock is a Buy

Analysts are optimistic about Super Micro stock, rating it a “Moderate Buy” overall, with a mean target price of $980.73. This indicates an upside potential of about 20.7% from current levels. 

Out of 13 analysts covering SMCI, 8 have a “Strong Buy” rating, 4 have a “Hold” rating, and 1 has a “Strong Sell” rating.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.