Server and storage solutions manufacturer Super Micro Computer, inc. surged 13.3% during normal trading hours to a price of 51.63, making it our gainer of the day. SMCI outperformed both the S&P500 and Nasdaq 100 composite indices by 12% on a heavy day of trading that saw 2,067,269 trades compared to its daily average of 472,629.
SMCI stock is jumping on today’s news that it has raised its earnings and revenue guidance by 40% and 50% respectively. This won’t come to a shock to seasoned investors in the company, which has beat its last four earnings estimates. The steep increase in share price could indicate that investors believe the company is on track to beat earnings again on August 9 -- even with the significantly raised guidance.
Super Micro’s financial data paints a mixed picture, however. While the company shows positive trends in income, profit, and asset growth, its debt levels are rising at a much faster rate -- more than 100% per year since 2019. This is despite the fact that SMCI repaid more than $500,000,000 of its debt in the last twelve months.
Another concern is its levered free cash flow, which at negative $457,340,000 is at its lowest point in years. It means that much more cash has flowed out of the business than in over the last twelve months, despite its healthy profit levels and an operating margin of 4.56%. A consistently positive free cash flow is generally seen as a sign of a well managed business that can sustain long term growth, yet SMCI’s has been extremely irregular.
Management’s possible challenges in ramping up operations and controlling debt levels could hamper Super Micro’s ability to meet growing demand in coming years. According to IDC Corporate USA, a research firm, demand for servers is expected to grow steadily well into 2026. And Super Micro’s market share is growing compared to more established firms such as Dell, which has seen its market share steadily decline.
Dell controls 15% of the x86 server market, compared to Super Micro’s 5.3% share. Dell has a much lower price to earnings (PE) ratio (6.58 versus 14.6) and has slightly higher operating margins at 4.99%. Dell’s profit levels and free cash flow are on a slight downtrend, but are far more regular and have never gone negative since 2019. Income levels are up and debts are decreasing. But as a larger and more diversified business, Dell may not be the best benchmark against which to judge Super Micro’s finances.
Although SMCI is up 32.4% this year, its price has been highly volatile in recent months, tumbling 28% percent between May 30 and June 27, 2022. Should the company’s growth story prove to be true, and its management capable of executing it, then it may justify the average analyst recommendation of BUY and target price of $78.75, implying that shares are trading at a 34% discount.
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