SMCI

Why Super Micro Computer Stock Slumped This Morning -- but Shouldn't Have

On the heels of a remarkable rally, shares of server and storage-solution specialist Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, have been taking a breather. It has gained roughly 700% over the past year, but gravity might have finally caught up with the company. The stock shed as much as 10.1% on Wednesday. As of 2:40 p.m. ET today, the stock was still down 7%.

While the shares appeared to be caught up in the general market downturn today, there was actually good news in the form of bullish coverage from a Wall Street analyst.

Another Street-high price target

Rosy commentary came courtesy of Rosenblatt Securities analyst Hans Mosesmann, who maintained his buy rating on Supermicro shares while raising his price target to a Street-high $1,300. This suggests upside potential of 65% compared to Tuesday's closing price.

The analyst believes Supermicro will continue to be a beneficiary of the accelerating adoption of artificial intelligence (AI). Mosesmann suggests this is just the beginning as Supermicro will not only benefit from the secular growth of AI, but will also achieve "material share gains" in the server market.

This is the second such Street-high price target in less than a week. Late last week, Bank of America (NYSE: BAC) analysts initiated coverage on Supermicro with a buy rating and a price target of $1,040.

Accelerating demand

As I wrote last week, the demand for servers that can handle the rigors of AI is growing and could continue for several years. Bernstein analyst Toni Sacconaghi calculates that the server market could have a compound annual growth rate (CAGR) of 75% over the coming three years, calling the AI server buildout "unprecedented."

Some investors fear that the current environment might lead to an AI-fueled bubble, which could take down frothy stocks. The good news is that Supermicro currently sells for just 2 times next year's sales, the very definition of a bargain.

But even that fails to factor in the company's current stellar growth. Using the more suitable forward price/earnings-to-growth (PEG) ratio, Supermicro's valuation is 0.4 -- well below the standard of 1 for an undervalued stock.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Super Micro Computer. 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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