Super Micro Computer Inc. Moves up on Solid Guidance and AI

Key Points

• Super Micro Computer Inc. had a tepid quarter, but supply chain issues are to blame. 
• Its fourth financial quarter guidance has been robust and the momentum may carry into the next fiscal year. 
• Analysts are raising their targets and some see this stock gaining another 25% to 35%. 

Demand for semiconductors may be spotty, but trends within the technology industry drive business for Super Micro Computer Inc. NASDAQ: SMCI. Super Micro deploys the world’s leading semiconductor technology with its line of servers, services and accessories and the shift to next-generation technology, including AI, resulted in better-than-expected guidance. The news has the shares up another 30% extending the rally to new highs and taking the market ballistic.

Based on the AI outlook, this trend is in its early stages and could easily see this company double or triple in valuation. Among the largest growth opportunities in the AI industry will be infrastructure and services, each worth billions in annual spending. 

“Super Micro continues to see record levels of engagements in our new generation product lines, especially for AI applications," said Charles Liang, president and CEO of Super Micro. "We secured several new and large design wins and are deploying some of the world’s most leading GPU clusters. With the recent new key components supply chain challenges mostly in the rear-view mirror and production normalizing, we expect to gain share and expand scale as we emerge as the true leader for rack-scale total IT solutions.”

Super Micro's Tepid Quarter, Issues Wow Guidance 

Super Micro had a tepid quarter regarding the analysts' expectations, bringing in only $1.28 billion. That is a decline of nearly 6% year-over-year (YOY) in line with the consensus figures, although earnings were weak. The company widened the gross margin by 210 basis points compared to last year, but it was less than expected and left the adjusted EPS at $1.63. That’s up from the prior year, but was eight cents shy of consensus and would be a bearish catalyst if not for the guidance. 

The company’s tepid second-quarter results are due to supply chain issues that were resolved later than the analyst anticipated. This is evidenced by the guidance, which was reaffirmed for the year which ends with the next report. The takeaway is that the fourth-quarter guidance is well above the MarketBeat consensus and suggests that momentum could carry into the first-quarter period and the second half of calendar 2023. 

The new guidance sparked several analysts to comment, including Wedbush and Susquehanna. The four to show up on MarketBeat’s tracking tools include three price target increases, and one reiterated "underperform" with a price target well below the consensus. The consensus is $112, about 17% lower than the current price action due to the low target, but others see more upside. The two targets above the consensus have the stock trading in the $150 to $200 range, about 35% above the action. 

Institutional Activity Drives Super Micro Higher 

The institutional activity in Super Micro can tell you a lot. The institutions own about 73% of the stock and have been buying on balance. The activity includes rotation as profit-taking occurs but ramps higher every quarter. Assuming this trend continues, the institutions will increase their holdings to roughly 75% by the end of the second quarter of 2023. 

Technical Outlook: Super Micro’s Uptrend 

Super Micro is in an uptrend that gains strength. The current move is supported by the outlook and aided by a relatively high short interest that could continue to fuel the rally. The company has evident momentum and a clear position within the industry, so it should continue to build support. The price action may move sideways at this point or even pull back some before moving higher, which offers a buying opportunity. One target for support is near the $120 level, but a deeper pullback is possible if the short sellers pile back in.