The substantial return of +26.88 in a month from Super Micro Computer (NASDAQ:SMCI) should inspire you to profit. Cashing out paper winnings after a massive win is the wisest thing to do. On the other hand, looking Alpha Quant, SA Authors and Wall Street still believe that SMCI is a buy. I respectfully disagree with your assessments.
Profit-taking while the stock is still trading above $68 is the right thing to do. Averaging while SMCI is already touting a +50.64% YTD gain is not ideal.
A hold for higher earnings is the second best option. In fact, it is very tempting for momentum traders to stay long in Super Micro due to the chart below. SMCI is a red hot momentum stock this year.
If you think the bullish momentum will continue, go long or average up on SMCI. Market Emotion Indicator technicals remain bullish on this stock. Despite the huge one-month rally, SMCI’s RSI score is only 65.36. You have not reached the oversold score of 70.
The exponential moving average indicator is also bullish on SMCI. The 5-day EMA is 66.12. The EMA is bullish when the 5-day EMA is higher than the 13-, 20-, and 50-day EMA scores.
The Stochastic Oscillator is another accurate barometer of market emotion SMCI touts a Stochastic Score of 92.32. This score triggered a short-term bullish trade alert called buried stochastic oversold. In simple terms, the trade alert says that this action fast stochastic number has averaged more than 80 for the past five business days.
Take profit before there is a bearish reversal?
The $700 billion technological route what happened last week convinced me that we need to be more cautious. Data center operators like Google (GOOG) and Facebook (META) lost more than $100 billion each in market capitalization. This brutal treatment could infect Super Micro. Investors are nervous. They are taking money from companies related to technology. A bearish contagion could derail SMCI’s bullish momentum.
When there is a dumping attack on giant companies, dwarf companies like Super Micro Computer can be injured by falling debris. Data center operators are the primary customers of server hardware/custom compute hardware vendors such as super micro. a big boost to your rack scale server infrastructure products is why Super Micro achieved $5.2 billion income for F2022. The 46% YoY increase in sales is thanks to 2020/2021 Tailwind of COVID-19. Most of the world began working from home and learning from home at the start of the pandemic in early 2020.
Large data center operators saw their shares plummet as investors lost confidence in them. The knee-jerk reaction of beleaguered managers is often to announce cost cuts and other promises of safety to investors. Cutting costs means reducing the workforce and budgeting less for new equipment, travel, recreation, and other employee benefits.
It will be difficult for Super Micro management to sustain that 46% TTM Revenue CAGR. The global server industry has a market size of $89.91 billion. Unfortunately, its CAGR is now only 7.9%. The disadvantage of Super Micro is that it is in the low-growth server hardware industry.
Losing the tailwind of COVID-19
My bold forecast is that the evaporation of COVID-19 data center tailwind it could only give Super Micro a five-year average earnings CAGR of 16-18%. SMCI’s last 5 year revenue CAGR is only 14.61%. A large increase in year-over-year revenue is not sustainable for SMCI. Super Micro Computer Inc. is a dwarf among giants. This not yet among the leading server hardware vendors.
A dwarf competing against giants will operate on very low margins.
It is an obvious headwind that SMCI has a very low gross operating margin of 15.40%. The chart illustrates why SMCI’s positive momentum might not last another 12 months. Super Micro’s poor profitability is a poor metric when combined with uncertainty about the sustainability of that 46% revenue CAGR. A gross margin of less than 16% is also likely why SMCI has very affordable valuation ratios. Low profit companies do not usually get a high valuation.
The low forward P/E of 8.97x is still not enough to offset that 15.40% gross margin. Super Micro Computer is like selling your data center products at rock-bottom prices.
The huge 1 month price return of +26.88% smacks of hedge fund team spirit. Giving up while you’re ahead is the best trait of long-term winners. Withdraw paper profits before the big dealers do.
The other option is to be more greedy. Momentum technical indicators continue to say that SMCI is a buy. Wait and wait for more capital gains before accumulating profits.
I hope you have understood why the dumping of data center heavy tech stocks has repercussions for a small vendor like Super Micro Computer Inc. SMCI is a server-centric company that could see cost cuts in the future from data center operators. server farms and data centers. A difficult server market scenario could make that 15.40% gross margin even lower.
The saving grace against weakening sales of rack servers would be sales of AI and ML GPU accelerators. Being a reseller still increases the revenue figures. Super Micro should aggressively market itself as a provider of AI inference processors and ML GPU accelerators. Super Micro will never become a top 5 server provider.
My conclusion is that Super Micro should aggressively expand in the $10.41 billion AI hardware industry. This niche market has a high CAGR of 26.96%. This is better than the 7.9% CAGR of the traditional server industry.
Better profitability is highly desirable for Super Micro. His Altman Z-score is only 3.98, down from the safe score of 4. SMCI’s Piotroski F-score is Only 4. This is far from the highest score of 9. I conclude that SMCI does not offer good value at the current price level.