Stocks to sell

Don’t Chase Super Micro Computer Stock. You’re Too Late.

The artificial intelligence trend is still in full swing, and right now the market is enamored with AI server manufacturer Super Micro Computer (NASDAQ:SMCI). However, even if you’re ultra-bullish about AI hardware, there’s no need to pay an exorbitant price for SMCI stock.

Granted, Super Micro Computer posted impressive quarterly results and is about to be included in a major stock index. On the other hand, the market is highly efficient and already knows about these events. This looks like a case of overeager investors jumping the gun and pricing too much optimism into Super Micro Computer stock.

The Good News About Super Micro Computer

Don’t get the wrong idea. The AI-server market can certainly grow in the coming quarters, and Super Micro Computer is likely to generate robust revenue.

Super Micro Computer reinforced this point when the company raised its fiscal 2024 revenue guidance range. The company’s previously published full-year revenue outlook called for $10 billion to $11 billion; Super Micro Computer recently lifted this range to $14.3 billion to $14.7 billion.

That’s a big revenue-guidance hike, and now Super Micro Computer must live up to its own expectations. With SMCI stock surging from $300 to $1,100 this year, the market has high expectations for Super Micro Computer, as well.

Another piece of positive news for Super Micro Computer is that the company will soon be added to the S&P 500 large-cap stock index. This means that many index-fund holders will, in effect, be owners of Super Micro Computer stock.

Upon that announcement, investors pushed the Super Micro Computer share price up 18.65% for the day. So, once again, the market demonstrated how efficient it is in the 2020s.

SMCI Stock Is ‘Highly Susceptible’ to a Drawdown

Indeed, the market isn’t just efficient nowadays; it’s often over-efficient. I believe that Super Micro Computer shares have immediately priced in quarters or even years’ worth of positive news and growth.

The result is a valuation that cautious investors might find difficult to accept. After adding up the past four quarterly EPS results ($1.63, $3.51, $3.43 and $5.59) and then dividing the Super Micro Computer share price ($1,130) by that total, I figured that the company’s trailing 12-month price-to-earnings ratio is an uncomfortably high 79.8x.

I’m not the only person who’s concerned, apparently. Recently, Wells Fargo analyst Aaron Rakers warned that SMCI stock is “already discounting solid upside.”

I agree 100%. Rakers added, “We believe shares will be highly susceptible to any indications of tempering GPU-based server demand.” In other words, it’s risky to assume best-case future scenarios for Super Micro Computer.

Moreover, Super Micro Computer doesn’t hold an absolute monopoly over the AI-server industry. Rakers explained, “We remain cautious on increased competition in the AI server market from traditional vendors.”

SMCI Stock: Let It Come Back to Earth

Sure, there’s good news to report about Super Micro Computer. This news isn’t a mystery to the market, though. It’s already been priced in, and then some.

Now, Super Micro Computer has to deliver massive revenue growth to justify its current valuation. That’s easier said than done.

Therefore, investors shouldn’t be too eager to buy SMCI stock at its current price. Let it come down 20%, 30% or even 40% before scaling in with a small share purchase.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

Articles You May Like

China stocks just had their best day in 16 years, sending related U.S. ETFs soaring
3 More Stocks Billionaires Are Buying Now
The One Way to Get in on Elon Musk’s Robotaxi Before Its 10/10 Debut
Recursion gets FDA approval to begin phase 1 trials of AI-discovered cancer treatment
Top Wall Street analysts prefer these dividend stocks to strengthen portfolios