SMCI

Super Micro Computer Trades Near All-Time Highs: Is the Stock Still a Buy?

When it comes to artificial intelligence (AI), the majority of attention lands on the "Magnificent Seven" -- a catchy moniker used to describe the world's most valuable technology businesses: Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla.

Among this small group, Nvidia might be the most important. The chipmaker's breakthroughs in networking are supercharging generative AI applications including machine learning and large language models (LLMs).

One company that has started to become affiliated with Nvidia is Super Micro Computer (NASDAQ: SMCI). The company works extremely closely with Nvidia, and as such, this relationship has served as a bellwether for Supermicro (as it's commonly known).

Over the past year, shares in Supermicro have soared 1,180%. Given the meteoric rise, investors may be wondering if they've missed the boat. Let's take a look at the full picture and assess if buying shares of Supermicro stock makes sense right now.

The next Nvidia?

Supermicro's close ties to Nvidia have some investors thinking the company could be the next big breakout tech stock. However, it's paramount to understand that Nvidia and Supermicro are very different businesses.

Nvidia is a semiconductor company. By contrast, Supermicro is an IT architecture operation. The company helps semiconductor businesses design server racks and storage clusters.

Given the demand for Nvidia's graphics processing units (GPUs) and data center services, it's not a surprise to learn that Supermicro's business has been on a roll. So while Supermicro could be seen as a "stealth Nvidia," investors should realize that an investment in the stock represents more of a hedge to other AI positions you may own.

Two bags labeled risk and reward balancing on a board.

Image source: Getty Images.

Take a look underneath the hood

The chart below illustrates Supermicro's quarterly revenue trends for the last decade. With sales growing over 100% annually, it would appear that Supermicro is on quite a roll.

SMCI Revenue (Quarterly) Chart

SMCI Revenue (Quarterly) data by YCharts

However, taking a look further down the income statement sheds light on some important features of Supermicro's business. Namely, Supermicro has ratcheted up expenses to invest in more design innovations as well as market share acquisition strategies.

As a result, the company's margins are deteriorating. In other words, despite unprecedented revenue growth, the company's margins are falling. This dynamic could have material impacts on the long-term sustainability of the business, as it could result in extended cash-flow burn or even a liquidity crunch.

Is now a good time buy Supermicro stock?

I'd argue that shares of Supermicro have soared for the wrong reasons. The stock trades almost in tandem with Nvidia despite the two being tangentially related businesses, at best.

The chart below shows that Supermicro's price-to-sales (P/S) multiple has not only extended in recent months, but is materially higher than its peers. In fact, its P/S ratio of 7.3 is more than double that of its next closest competitor, IBM -- which is a much larger, diversified company.

SMCI PS Ratio Chart

SMCI PS Ratio data by YCharts

I personally have concerns over the prospects of long-term sustained profitability given Supermicro's low margin profile. As competition in the chip race heats up, it's likely that Supermicro's relationship with Nvidia will become less valuable. Given these variables, a prudent strategy is to keep an eye on Supermicro's operating performance.

In the long run, having some exposure to the company might not hurt as Supermicro provides an under-the-radar pocket within the overall AI realm. But for now, I'd avoid the momentum fueling its shares.

Should you invest $1,000 in Super Micro Computer right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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