Why now is the right time to invest in super micro computer stocks

Results from Taiwan semiconductors New York Stock Exchange: TSM crashed the semiconductor market, and all it took was a little news from Supermicrocomputer NASDAQ:SMCI to trigger the sell-off. Taiwan Semiconductor created it by reducing its semiconductor growth outlook this year, a fact that plays into the market’s valuation, which was high and driven as much by AI hype as reality. TSM still expects 10% industry growth driven by AI.

Super Micro Computer sparked an industry-wide sell-off when it delayed its earnings report. That’s all; Super Micro has delayed the report, and this could be due to many reasons. The market chose to focus on the worst, resulting in a 25% correction in the stock price and an opportunity for us today.

Expectations for Super Micro are high

The market is nervous due to the expectations inherent in Super Micro Computer’s results. Among the many determinants of the outlook is business NVIDIA NASDAQ:NVDA. Super Micro Computers is a significant user of NVIDIA and other GPUs and should see the same, if not a bigger increase in its business. NVIDIA is expected to post 4x revenue growth in its next report. This has led analysts to increase their estimates for Super Micro’s revenue and earnings several times over the last twelve months, setting the bar exceptionally high.

The postponement of the release hit a sensitive point for the market, suggesting weak results or insufficient guidance to support high share prices. Super Micro leans towards prerelease, so there is precedent even if the assumption is wrong. At present, analysts expect revenues to grow at least 200% compared to last year and for the margin to widen. Earnings are expected to grow more than 250%.

There are also technical factors at play that aid volatility. Analyst sentiment has improved along with earnings outlook, leading them to raise their price targets for the stock. The increase in the consensus price target is huge and suggests that a bubble may have formed.

The analyst consensus target tracked by Marketbeat.com has increased 950% from $90 to $950 in twelve months due to the growth of artificial intelligence, sales potential today and the long-term productivity gains it should bring. A small 25% return is nothing compared to the big picture: AI is still in its early stages and will support a high level of business for this company long into the future.

Until then, the consensus target is above the current price movement and offers 35% upside. Also noteworthy is the fact that analysts’ high price target was set days before the announcement. It is $1500 and indicates over 100% upside. If FQ3 results are solid and have good guidance, this stock could return to consensus and rise as quickly as it fell. Analysts expect an acceleration in results through the end of the year, but a slowdown in growth next year. However, the 50% growth forecast for next year is enough to bring the valuation to a very reasonable level of 23X, with the shares trading at a two-month low.

Insiders sell, institutions buy super micro computers

Insider sales, including larger shareholders, could be a drag on the market because they have been selling. Insiders own about 17% of the stock and have sold $70m of shares in the last twelve months. Their business increased quarterly in 2023, peaking in the first quarter of 2024 as the stock price hit all-time highs. The sales ended in February, but could resume at any time, and the rebound in prices could be the trigger. The institutions counterbalance the internal activity. They could also trigger a rebound because they own about 85% of the play and have been buying on the balance sheet since the fourth quarter of last year.

Super Micro Computers has seen a significant correction, but the bulk of the sell-off may already be over. The market has fallen to the previous support level, where support is still evident. The indicators also reveal oversold conditions and divergences that indicate bottoming and rebound potential. Assuming the market does not drop below $620, it should move sideways at current levels with the possibility of an uptrend later this year or next. If the market drops below $620, it could fall back below $100 from where it came from. This is not expected.

Before you consider Super Micro Computer, you’ll want to hear this.

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