Liquid Cooling AI Racks are the Next Opportunity for Supermicro Computer (SMCI)

June 10, 2024 / By /
Stock (Symbol)

Supermicro Computer (SMCI)
Stock Price

$899
Sector
Technology
Data is as of
May 21, 2024
Expected to Report
August 6
Company Description
Super Micro Computer, Inc. provides Silicon Valley-based accelerated compute platforms that are application-optimized server and storage systems for various markets, including enterprise data centers, cloud computing, artificial intelligence, fifth generation (5G) and edge computing.

The Company’s solutions include artificial intelligence (AI) and high-performance computing (HPC), enterprise applications and data analytics, data management, cloud and virtualization, 5G, edge computing and Internet of things (IoT), and hyperscale infrastructure.

The Company also provides global support and services to help customers install, upgrade, and maintain their computing infrastructure.

The Company offers an array of products which include servers and storage, building blocks, IoT and embedded, networking, and workstations and gaming products.

The Company operates in United States, Asia and Europe. Source: Refinitiv
Sharek’s Take
David SharekIn last qtr’s earnings call, Supermicro Computer (SMCI) announced another sensational quarter with profits up 308% as revenue grew an eye-popping 200%. The key driver for the revenue growth was the AI GPU platforms that constituted more than 50% of revenue, with strong growth in both enterprise and cloud service provider markets. SMCI’s CEO sees liquid cooling in datacenters rising from 10% this year to 30% next year. The company has created new Direct Liquid Cooling (DLC) building blocks which are ready for high volume production. With DLC, customers can reduce cooling expenses up to 40%, save datacenter space, and put more power to computing instead of cooling. Liquid cooling is the next opportunity for growth at Supermicro. The company is on track to produce 2000 liquid cooling AI racks per month. Each rack supports 64 NVDA H100 GPUs.

Super Micro Computer (aka Supermicro) is a Silicon Valley-based manufacturer of server and storage systems for enterprise data centers, cloud computing, artificial intelligence (AI), 5G, and edge computing. It is the only US-based large-scale AI platform designer and manufacturer. The company is headquartered in Silicon Valley. Its Products are manufactured in plants in the Netherlands and Taiwan, then more than half the production is completed in San Jose, California. The Taiwan plant has lower production and operational costs that benefit profit margins. The company also has a new Malaysia campus set to go online this year that will provide an even better profit margin and will double the company’s capacity. SMCI’s revenue has been climbing rapidly, from $5 billion in 2022 to $7 billion in 2023, and perhaps $14 billion this year. Fiscal 2025 (which is just a month away) is expected to hit $24 billion. SMCI’s Silicon Valley and Taiwan facilities can support $18 billion in annual revenue, while the new Malaysia facility will improve costs and take capacity to much higher than $20 billion in annual revenue.

Here are some other facts on SMCI:

  • Supermicro has evolved from building motherboards to full systems that include software and system integration. Historically, data centers have been constructed uniquely for each project.
  • SMCI’s Plug N’ Play Rack Solutions allow the company to quickly “build” server and storage systems quickly using building blocks across its product lines. It mixes and matches GPUs and processors in the same metal box.
  • The company then designs the system, and provides rack assembly, cabling, software and firmware configuration, software design and liquid cooling.
  • Supermicro’s systems use less power than some of its competitors. This saves the customer money and makes for a Greener environment.
  • High power efficiency, air-cooling, and liquid cooling expertise are key differentiators that are keys to the company’s success.
  • Supermicro Total IT Solutions takes care of design, integration and deployment, and software management. This reduces complications in the data center.

Here are the company’s performance per segment:

  • OEM Appliance and Large Data Center Vertical: (50% of the total revenue, grew 222% year-over-year).
    • One existing CSP large data center customer represented 21% of this segment’s revenue.
  • Enterprise Channel Vertical: (49% of the total revenue, grew 190% year-over-year)
    • Growth was primarily driven by industry recognition of solution price-performance metrics and reliability
    • One existing enterprise channel customer represented 17% of this segment’s revenue.
  • 5G Zelco/Edge/IoT: (1% of the total revenue)

Supermicro (SMCI) is expanding so rapidly it reminds me of Dell Computer back in the 1990s. Dell was also a “simple” company in putting computers together, but the company’s profits soared during the decade due to its low prices. SMCI is a top holding in my Growth Portfolio and Aggressive Growth Portfolio. The stock just corrected after a parabolic run, but the numbers still look great. I think another run is coming.
One Year Chart
When we looked at SMCI last qtr, the stock was just $682. After that, SMCI ran to a high of $1229. At that point, the stock was on a parabolic run higher and was due to correct. Note, after parabolic runs stocks sometimes give up 50% of their gains. SMCI basically ran from $250 to $1250 and the mid-point is $750 — which is around where the stock corrected to!

When SMCI was $1229 the P/E was 56, which was too high. This quarter the stock has a P/E of just 26. Do note this qtr I’m looking ahead to Fiscal 2025 to calculate my P/E as SMCI’s Fiscal year end is June 30th (a month away).

Quarterly profit growth reaccelerated to triple-digit growth last qtr. Top stocks often have profit growth above 100%.

The Est. LTG of 62%. This is a long-term profit growth estimate. This figure is exceptional.
Earnings Table
Last qtr, SMCI delivered 308% profit growth and surpassed estimates of 250% growth. Revenue increased to a whopping 200%, year-over-year, and missed the estimates of 202%. Gross profit margin decreased to 15.5% from 17.6% last year.

Growth was again led by AI GPU platforms, which represented more than 50% of revenues. SMCI is having supply chain challenges with DLC components, and management believes the situation will gradually improve in the coming qtrs. 

Here are the geographical results during the period:

  • US: 70% of company revenue; sales +242%.
  • Asia: 20% of total revenue; sales +257%.
  • Europe: 7% of revenue; sales +30%.
  • Rest of the World: 3% of total revenue; sales +87%.

Annual Profit Estimates climbed again this qtr. Notice 2025 profit estimates have grown from around $19 to around $34 during the past four quarters. This suggests 2025 profit estimates could increase in the coming quarters. There’s still 5 qts left before the end of Fiscal 2025.

Qtrly Profit Estimates are for 130%, 125%, 56%, and 27% growth over the next four qtrs. I like that profits are expected to more than double the next two quarters. Analysts expect revenue will increase 141% next quarter.
Fair Value
This stock historically had a low P/E as it has been in a low-margin business. But the company has advanced its offerings, and the valuation has deservedly increased.

SMCI has a Fiscal Year end June 30th, and the company is in Fiscal 2024 now.

This quarter the stock has a 38 P/E if we look at 2024 profit estimates (the Current row). My Fair Value is a P/E of 38 as well, and if we look ahead to 2025 (2025 Est row) the stock has 44% upside. The stock has 80% upside to my 2026 Fair Value.
Bottom Line
Supermicro Computer (SMCI) has just finished a parabolic run higher, and has since consolidated a bit. That’s good. Prior to this big move higher the stock had a rocky history of growth.

Wow, what an excellent quarter from this company. It’s stunning to see profits and revenue climb this rapidly. In addition, investors can get one of the stock market’s best stocks in the AI period for just 26x next year’s profit estimates. AND these estimates have been jumping higher.

SMCI stays 2nd in the Growth Portfolio and Aggressive Growth Portfolio Power Rankings. NVIDIA is still the king!
Power Rankings
Growth Stock Portfolio

2 of 34

Aggressive Growth Portfolio

2 of 17

Conservative Stock Portfolio

N/A

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