Super Micro Computer Announces Stock Split. But There’s an Even Better Reason to Buy Now.

Stock splits are fairly common among artificial intelligence (AI) companies, because they have performed so well over the past year and a half that their stock prices have reached a level where a split is a good idea.

One of the companies that recently joined this club is Super microcomputer (SMCI 1.39%)commonly known as Supermicro. The company announced a 10-for-1 stock split, effective October 1, which will increase the stock price from approximately $630 to $63 per share.

While the news of a stock split is exciting, I think there is an even better reason to buy shares now before the split occurs.

Data center products are in huge demand

One sec Nvidia may make headlines because it’s tied to building AI infrastructure, many other companies are benefiting from the same tailwinds. Supermicro is one of them, as its products, from data center hardware to complete racks, are in high demand.

Although many companies offer similar products to Supermicro, they stand out from the competition for two reasons. First, Supermicro servers are highly configurable and can be scaled to any size workload. Second, Supermicro servers are more energy efficient than the competition, which is very important because energy costs are significant over the life of a server.

These strengths have fueled Supermicro’s explosive revenue growth over the past year, and forecasts point to continued growth.

SMCI Revenue Quarterly Data by YCharts

Looking ahead to the first quarter of fiscal 2025 (ending September 30), management expects revenue of $6 billion to $7 billion, up 183% to 230%. For fiscal 2025, revenue of $26 billion to $30 billion is projected, up 74% to 101% year-over-year.

That’s significant progress and a huge reason to invest in the stock now. At the end of fiscal 2023, Supermicro had a long-term annual revenue target of $20 billion. And at the end of the second quarter of fiscal 2023, that target was just $10 billion.

It’s clear that this market is growing rapidly, and the appetite for Supermicro’s products is growing with it. However, that target was raised again in the latest results to an astonishing $50 billion in annual revenue. That’s a huge increase from current guidance, and I think it’s a phenomenal reason to own the stock, as Supermicro consistently achieves its long-term goals.

However, after the Q4 2024 results were announced, the stock fell 20%. It seems like an odd reaction, but that’s because another important indicator saw a weakening.

The share price is quite low compared to the share prices of other companies

While revenue growth is important and makes headlines, investors also need to see earnings growth. Supermicro’s margins fell sharply in Q4 due to new product launches, and this weakness is expected to last through most of fiscal 2025. However, this decline is short-sighted thinking because if Supermicro can recover its margins by the end of fiscal 2025, it would represent a huge value opportunity.

SMCI P/E (Forward) data by YCharts

The stock is currently trading at 18.4 times forward earnings. Compared to most stocks on the market, that number is pretty cheap. It also implies a 72% increase in earnings over the next year.

Supermicro’s management is already forecasting 74% revenue growth, so for the current valuation to make sense, earnings would have to remain that low throughout the year.

This divergence presents a good buying opportunity for the stock, and a patient investor can expect a satisfying return on investment if Supermicro’s margins improve over the next year.

Keithen Drury has no position in any stocks mentioned. The Motley Fool has a position in Nvidia and recommends it. The Motley Fool has a disclosure policy.