Shares of Super Micro Computer (NASDAQ: SMCI), also known as Supermicro, jumped Thursday, climbing as much as 13%. As of 1:54 p.m. ET, the stock was still up 12.3%.
The catalyst that drove the server and storage solution specialist’s stock higher was bullish coverage by a major bank.
A Street-high price target
Bank of America analyst Ruplu Bhattacharya initiated coverage on Supermicro, assigning a buy rating and a Street-high price target of $1,040, according to TheFly. This suggests a potential upside of 18% compared to Wednesday’s closing price. This prediction comes despite the stock’s dizzying run over the past year, when it notched a gain of 847%.
BofA believes AI-fueled demand will continue, driving Supermicro even higher. The analyst further suggested the potential market for AI servers is “much larger” than the estimates calculated by his Wall Street colleagues. The bank believes the market for these AI-centric servers could achieve a compound annual growth rate of 50% over the coming three years. Given that Supermicro is a leading provider of AI servers, BofA expects its revenue to “grow even faster.”
Are those growth rates achievable?
Investors questioning the validity of the growth targets in the AI server market may be in for a surprise.
Late last year, Bernstein analyst Toni Sacconaghi pointed out that the server market — which had grown at a compound annual rate of 3% over the preceding 25 years — was expected to grow at 75% annually between now and 2027. He suggested that this “unprecedented” AI server build-out might be happening “too quickly,” which could eventually lead to a “digestion period” — analyst-speak for a glut. While his take suggests that growth could eventually stall, that time is still several years down the road.
All indications are that sales of Supermicro’s servers and other digital storage components will ride the tailwind of AI even higher. While the stock is currently selling for 3 times forward sales, that fails to take into account the company’s triple-digit percentage growth rate. Using the more appropriate forward price/earnings-to-growth (PEG) ratio, Supermicro’s valuation is 0.4 — and a stock is generally viewed as undervalued at any PEG ratio below 1.
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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.
Why Super Micro Computer Stock Rallied on Thursday was originally published by The Motley Fool