outline
Super Micro Computer (hereinafter SMCI) has shown remarkable growth in recent years and is receiving great attention thanks to the increasing demand for AI server infrastructure. In this article, we will evaluate SMCI’s growth potential based on its recent performance and issues.
What kind of company is Super Microcomputer?
No matter what anyone says, the star of the recent stock market is definitely NVIDIA, but if I had to choose one more, I would choose SMCI. SMCI is a company that provides high-performance servers and storage solutions.
SMCIProduct Example (Source: Super Micro Computer, Inc.)
We sell optimized parts combinations and equipment to suit customers’ usage purposes and needs. You could say that they are selling so-calledserver room computerslike the one in the photo above. As virtually all companies around the world are highly interested in AI, cloud computing, and data centers, they are collaborating with major chip makers such as Nvidia, AMD, and Intel to continuously pursue innovation and market expansion of related products.
AI servers, cloud computing, and increased data generation are acting as key growth drivers and are expected to continue over the next few years. SMCI increased its market share in the server market from 3.5% to 7.5%, taking third place behind Dell and HPE.
Performance and Valuation
3rd quarter 2024 earnings announcement
It may be predictable just by looking at the company introduction, but the 2024 third quarter performance announcement showed truly tremendous growth. It recorded an annual sales growth rate of 200%, and EPS also quadrupled to $6.65 during the year. Despite this performance, sales forecasts fell short. Just by looking at this, you can see how high the market's expectations are.
Free cash flow (FCF) was negative in the third quarter. However, this has a significant impact on securing inventory to meet the enormous server demand. SMCI has $2 billion in cash, which exceeds its total debt. The company has a fairly solid financial position with a debt ratio of 37.29%.
Valuation
CompanyP/EP/E (FWD)Super Micro Computer (SMCI)50.4025.06Dell Technologies (DELL)29.6618.62Hewlett Packard Enterprise (HPE)15.2711.10PER comparison of 3 SMCI peers (Source: YahooFinance)
SMCI's forward-based PER is 25.06. The recent PER of the S&P 500 is around 28, and considering that SMCI is the central theme of AI, it is difficult to consider it as high value.
It is difficult to assert that DELL and HPE are undervalued based on PER alone. In the case of SMCI, it is safe to say that it is a pure player that only operates on corporate server sales. Therefore, if you want to invest in AI, big data, or cloud, SMCI is still judged to be the best choice based on its current value.
Of course, there is always controversy over the possibility of bubbles and recessions in the stock market these days, and since the FWD indicator can change at any time depending on future competitive conditions and server demand, continuous monitoring of growth potential is necessary.
Competitiveness
Immersion cooling technology
SMCI has an advantage over its competitors through immersion cooling technology, which is said to be the final version of computer cooling technology. For reference, when you think of liquid immersion cooling, you may think of the underwater data center that Microsoft tried some time ago, but SMCI's cooling solution is not much different from a general server room environment.
Microsoft Underwater Data Center (Source: AI times)
Cooling methods using liquids, such as liquid immersion and water cooling, can be said to be a hot topic in the recent high-performance server market. Temperature management in computers is more important than you might think, and even in gaming PCs used at home, the temperature of the processor can exceed 100℃ depending on the operation of the cooler. Naturally, cooling is even more important in corporate server rooms where multiple PCs are stacked on top of each other. If a PC is left at high temperatures, process performance deteriorates, failure rates increase, and data may be lost.
The reason liquid cooling is becoming a hot topic is also because of its economic feasibility. Servers that run AI are said to generate about 5 times more heat than existing servers and require 10 times more cooling. It is known that applying liquid cooling to these high-performance servers can save approximately 40% of electricity. ( https://www.epnc.co.kr/news/articleView.html?idxno=241532 )
Direct to Chip method (left), Immersion Cooling method (right) (Source: Super Micro Computer, Inc.)
There are two main methods of cooling using liquid. There is the Driect to Chip method, which cools a metal plate cooled with water by directly adhering it to the chip, and the Immersion Cooling method, which cools the server module itself by placing it in water. Supermicro supports both methods.
Comparison of heat dissipation effects according to cooling method (Source: Super Micro Computer, Inc.)
Compared to the air cooling method, the direct to chip method shows more than twice the heat treatment efficiency per server rack, and the immersion method shows about twice the heat treatment efficiency compared to the direct to chip method. Although not fully shown in the picture, it is said that cooling of up to 100kW per rack is possible.
Supermicro is shining in the cooling field. It was the first to launch a water-cooled server and is dominating the market through its partnership with NVIDIA. SMCI is currently producing servers according to its own specifications. For reference, there is no global standard for liquid cooling servers, making it difficult to exchange between different servers.
However, it is not a situation where SMCI enjoys an exclusive position with NVIDIA due to its own standards, and competitors can enter at any time depending on warranty approval from chip makers such as NVIDIA.
Wide product lineup
SMCI has a broader lineup than its major competitors, DELL and HPE. Based on 449 servers and 90 storage product lines, it is possible to provide solutions tailored to customer needs, and various customization options are also available.
SMCI product lineup (Source: Super Micro Computer, Inc.)
As proof of this, SMCI is rapidly expanding its share of the server market and currently holds the third largest market share after DELL and HPE.
Risk factors
Intensifying competition in liquid cooling technology
As the importance of cooling is increasing, competition with DELL and HPE is expected to intensify for liquid cooling and immersion cooling. In fact, in the case of the direct to chip method, it is a technology so widely known that ordinary people interested in high-performance PCs personally configure it to improve the performance of each device.
Direct to Chip cooler for personal PC, also known as water cooler (Source: Namu Wiki)
The same goes for immersion cooling. In fact, it is difficult to say that the technical barrier is high because the technical concept can be easily understood by the general public. “How space-efficient the design will be, how user-friendly it will be without affecting the device (flooding, leaks, etc.)” and the degree of guarantee from chip makers such as NVIDIA remain.
Therefore, it is difficult to expect the technological advantage itself to last long, and competition from DELL and HPE is expected to intensify. If competition intensifies, margins may be pressured due to price competition and procurement of key components such as those from Nvidia may become difficult. In relation to this, DELL recently unveiled an NVIDIA-based AI server adopting the Direct to Chip method.
Equity Risk
Unlike a U.S. listed company, there is a risk of major shareholder equity. In fact, these companies are often seen on Nasdaq, but SMCI's form is somewhat more Korean. Ablecom is one of SMCI's main contractors and manufactures PC and server components such as rackmounts and heatsinks. SMCI's CEO Charles Liang's older brother, Steve Liang, serves as CEO, and Charles Liang and his wife own 10.5% of the stock. Compuware is SMCI's main distributor, and its CEO is Charles Liang's brother, Bill Liang. Although it does not seem to be an immediate problem, it can cause transparency issues and conflict of interest issues, and undermine investor trust.
conclusion
Super Micro Computer, Inc. Considering the growth shown by (SMCI), the fact that it is a pure player, and its competitive advantage due to its leadership in immersion cooling technology, it is still judged to be a price range worth investing in. However, as the technological barrier is not that high, intensifying competition seems inevitable. Continuous monitoring of SMCI's performance and competitors' responses seems necessary.