Artificial intelligence (AI) is perhaps the biggest investment theme of the year. Technology companies active in this area generated profits in the S&P500 in the first half, and many of these players continue to advance. Why are investors so interested in AI? Because of technology’s potential to revolutionize everything from your daily routine to the way a business operates. As a result, companies that create or use AI could see their revenues increase.
One of the early winners is Super microcomputer (SMCI 2.93%). This AI equipment maker has seen profits rise since the AI boom began, and stock performance has followed suit. Supermicro shares are up 2,100% in the past five years and 188% in the first half of this year – even beating the AI market star Nvidia.
However, the Supermicro story has had some difficult chapters in recent weeks, which dampened investor interest in the stock. But Wall Street sees this as a buying opportunity and expects the stock to rise over the next twelve months. Should you follow Wall Street’s advice or wait to buy this AI player? Let’s find out.
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Products essential for data center operations
First some background information about this AI player. Supermicro is not new to the area. It has been around for more than 30 years. The company sells servers, workstations and other products that are integral to data center operations. Before the AI boom, Supermicro was gradually growing in sales and profits, but these numbers really took off when demand from AI customers gained momentum.
SMCI net income data (annual) according to YCharts.
This year, Supermicro reached a major milestone: revenue in one quarter exceeded what it generated in a full year in 2021. Customers have flocked to Supermicro thanks to its ability to quickly tailor its products to their needs and incorporate cutting-edge chip innovations. . The company may do this for two reasons: most products contain similar parts, making them quick and easy to assemble; and Supermicro works with all the top chip designers so it can immediately integrate their latest chips into its equipment.
Additionally, Supermicro may see a new wave of growth on the horizon as demand for data center direct liquid cooling (DLC) increases. Supermicro predicts that 25% to 30% of new data centers will include DLC in the next twelve months and plans to dominate the market.
A short report and other problems
This all sounds great. What has gone wrong at Supermicro in recent weeks? In late August, Hindenburg Research released a brief report claiming there were problems at the company, and this was followed by a Wall Street Journal (WJ) article about a possible Justice Department investigation into Supermicro. The company also delayed the filing of its 10-K annual report, a move that prompted investors to worry about Supermicro’s earnings.
Supermicro called the statements in the brief report “false or inaccurate.” In the same letter to customers, the company said that while the 10-K report would be late, the company does not expect any significant changes in earnings. As for the WJ report, Supermicro declined to comment.
Supermicro shares fell 29% in the one-week period following the short report, but have since risen more than 20% from the September 6 low.
Today, the average Wall Street recommendation is a “buy,” and the average stock price forecast calls for a 60% upside over the next twelve months. So Wall Street is clearly optimistic about the company’s prospects.
Should you buy on the dip?
Now let’s get back to our question. Should you follow Wall Street and buy this stock on the dip or wait on the sidelines? The answer depends on your comfort with risk. If you are a cautious investor, now is not the time to buy Supermicro stock. While the company has commented on the brief report, we still don’t know if Supermicro will face a Justice Department investigation.
Of course, research isn’t necessarily a deal breaker when it comes to investing. Many companies have faced government investigations, and those investigations have not hurt long-term investment issues. Still, cautious investors may want to wait for more clarity on the uncertainties weighing on Supermicro before diving in.
However, if you are an aggressive investor and can tolerate some risk, you may want to consider buying a few shares of Supermicro at the current buying level of 14 times forward earnings. After all, the facts we have today still support a fantastic long-term growth story, and early investors could potentially make big profits.
