Alongside Nvidia (NASDAQ:NVDA), Super Micro Computer (NASDAQ:SMCI) is the company that has been capturing the most attention within the artificial intelligence (AI) space this year, thanks to a meteoric rise in its share price. Despite breakneck gains, JPMorgan (NYSE:JPM) analysts said in their fresh coverage that they see more upside potential in the SMCI stock, which rose nearly 10% on the news.
SMCI stock rally on AI optimism
The exceptional rally in SMCI stock this year comes primarily thanks to the server manufacturer’s strategic advantage in the generative AI sector and its strong partnership with Nvidia.
This relationship positions Super Micro favorably against competitors such as Dell (NYSE:DELL) and Hewlett Packard Enterprise (NYSE:HPE) by enabling quicker product launches.
Historically, Super Micro has been one of the first companies to access AI chips from both Nvidia and Advanced Micro Devices (NASDAQ:AMD), aiding in the testing of server prototypes. This early access has been a key factor in establishing the company as a vital supplier of servers that power generative AI applications, contributing to a more than 240% surge in SMCI stock price this year.
Located less than 10 miles from Nvidia and AMD in California, Super Micro has the capability to rapidly respond to market demands. Analysts note the company can manufacture, assemble, test, and ship a server rack within just a few weeks, provided that all components are on hand.
Super Micro's strategic positioning is reflected in its financial performance, with revenue more than doubling in the last quarter of 2023. Analyst expectations, as surveyed by LSEG, predict continued triple-digit growth at least through the September quarter of 2024.
Similarly, Bank of America (NYSE:BAC) analysts foresee Super Micro's share in the AI server market increasing from 10% in 2023 to about 17% by 2026.
The robust growth has seen SMCI’s valuation soar to $60 billion from around $5 billion prior to the launch of ChatGPT in November 2022.
JPMorgan starts coverage on SMCI stock
The latest testament to optimism surrounding Super Micro Computer stock came on Monday, when JPMorgan initiated research coverage on SMCI with an Overweight rating and a December 2024 price target of $1.150.
The Wall Street giant’s analysts see the firm as “the leading company in the AI compute market,” which continues its rapid growth amidst strong demand for AI model training, Retrieval-Augmented Generation by second-tier Cloud Service Providers (CSPs) and Enterprises, and the future needs for AI inferencing workloads.
“We expect the leadership to continue, led by a balance of custom built solutions and fast time to market, although potential upside is more likely from rapid expansion in the AI Server market rather than expansion of the already premium valuation multiple,” analysts said.
Citing estimates from 650 Group, the AI server market is expected to balloon from $41 billion in 2023 to $283 billion by 2028, JPMorgan’s team highlighted, adding that optimism around Super Micro Computer stock is less about an increase in its already high valuation multiples and more about the expected expansion of the market itself.
They also pointed out that Super Micro Computer made a significant impact on the server market by offering a balance between custom-built solutions that surpass the efficiency of branded companies and deliver a faster time to market compared to Original Design Manufacturer (ODM) companies.
Against this backdrop, analysts anticipate a Compound Annual Growth Rate (CAGR) of more than 43% in revenue for Super Micro from fiscal year 2023 to 2027. The revenue forecast for 2027 suggests that the company is expected to capture a 10%-15% share of the AI Server market, which they see “as conservative given its early lead.”
“Gross margins are moderating due to pricing power of customers, but with Enterprise driving as much as 70% of AI server market by 2027/28, we expect Super Micro’s gross margins to recover,” analysts added.