Super Micro Computer’s (NASDAQ:SMCI) delivered best-in-class returns for stock market investors over the past year. The stock’s up 841% over 12 months and 232% since the start of the year. It’s also recently gained promotion the S&P 500 and was declared the best performing company on the index in Q1.
What makes it special?
Super Micro is a provider of Total IT solutions, specialising in server and storage. These are playing a pivotal role in powering the infrastructure that drives machine learning algorithms and deep learning models — artificial intelligence (AI).
The San Jose-based firm also has proprietary cooling technology that allows the latest high-power chipsets to work at maximum efficiency. These super-computer services are also integral to our increasing demand of cloud storage. Super Micro’s clients include Amazon, Alibaba, Google and Microsoft.
Attractive valuation
When I started investing I was certainly naive in that I mistrusted companies with expensive price-to-earnings (P/E) ratios. I often failed to dive deeper into a company’s growth prospects.
Sometimes these stocks are simply overvalued — that’s how I feel about companies like Arm Holdings and Tesla right now — but sometimes we can find pockets of value in parts of the market that look expensive on first glance.
Super Micro’s one of these stocks. Expensive at first glance, but good value on further inspection. The firm trades at 66.9 times earnings from the trailing 12 months (TTM) and 43.2 times forward earnings. Of course, that sounds expensive, especially for UK-focused investors who may be used to much lower P/Es.
Moving forward however, Super Micro’s P/E’s expected to fall substantially to 31 times in 2025, and 26.6 times in 2026. Moreover, using analysts’ earnings forecasts, we can arrive at a price-to-earnings-to-growth (PEG) ratio of 0.86.
Normally, fair value’s indicated by a PEG ratio of one, and anything under this is typically considered undervalued. In this current (rather expensive) US market, Super Micro stands out as exceptional value.
The bottom line
There’s a caveat to the above. And it’s that forward earnings metrics are based on estimates. Analysts’ estimates are really useful, but they can be wrong.
It’s also the case that forecasts become less accurate as we look further into the future. That does mean buying a stock based on where we expect it to be in five years can be very risky.
Likewise, it’s also the case that Super Micro’s dominant position in this sector could be eroded over time. It’s a fast-moving sector and it’s hard to forecast exactly what’s going to happen.
However, I remain bullish on Super Micro, and believe the valuation metrics, combined with the company’s track record of beating estimates, could make it the S&P 500’s top performer in Q2 as well.
