Analyzing why the "hottest AI stock" Super Micro Computer is still worth investing in using the CANSLIM method.

It is well known that the CANSLIM rule is the investment strategy system of American investor William O'Neil. This rule believes that all historical bull stocks will show seven characteristics before a sharp rise, namely C (significant or accelerating growth in earnings per share and sales per share), A (annual earnings growth rate), N (innovation, new companies, new products, new management, etc.), S (market demand), L (industry leader), I (institutional investor recognition), and M (market trend, representing timing), collectively known as CANSLIM.

So far this year, Super Micro Computer (SMCI.US) has accumulated nearly a 300% increase, making shareholders very profitable. However, if investors measure this stock according to the CANSLIM rule, its upward trend may be far more than that.

Overview of Super Micro Computer

Investors familiar with Super Micro Computer know that the company's business strategy revolves around providing high-performance, energy-efficient server solutions to a wide range of industries. The company's products target industries with demanding computing needs, such as cloud computing, artificial intelligence, and big data analytics.

Super Micro Computer is known for its flexibility in responding to new developments in the server component market. Given the company's well-known connections with key industry players, they have the ability to obtain products using the latest CPUs or other advanced technologies ahead of competitors. In addition, the company's server solutions are highly customizable, allowing customers to tailor systems to their specific needs.

To maintain its leading position, Super Micro Computer has invested heavily in research and development. In fact, R&D spending has accelerated in sync with revenue growth, reaching 53.9% (1.088 billion USD as of December 2023, compared to 70.7 million USD in the same period last year).

Does Super Micro Computer meet the CANSLIM criteria?

Firstly, measured by the C characteristic, Super Micro Computer is a company with strong and continuously growing earnings.

The recently released financial report shows that Super Micro Computer's profit growth is exceptionally strong. From annual data, it can be seen that the company's earnings per share have increased by over 118.2% year-on-year (5.54 USD in 2022 to 12.09 USD in 2023). When measured by quarter, the company's basic earnings per share as of December reached 5.47 USD, a 65.3% increase from the same period last year (3.31 USD).

Although the outlook for the next quarter is expected to be between 5.40 USD and 5.55 USD per share, with a median increase of only 0.1%, considering the overall growth of the artificial intelligence market, there is still a high likelihood that the final result will exceed expectations. Most importantly, the company has a history of achieving better-than-expected performance.Super Micro Computer also meets the criteria of Type A, with a significant increase in revenue.

The company's financial report shows that in 2023, the revenue increased by 29.9% year-on-year (reaching $9.2528 billion in 2023, up from $7.1135 billion in 2022), and on a quarterly basis, it increased by 103.2% (reaching $3.6649 billion in the quarter ending in December 2023, compared to $1.8032 billion in the same period last year).

Looking ahead to the next quarter, the company expects net sales to be between $3.7 billion and $4.1 billion (with a median of $3.9 billion), representing an increase of about 6.5% from the first quarter, and a staggering 204% year-on-year growth (compared to $1.2833 billion in the same period last year).

Similarly, Super Micro Computer also meets the Type N standard.

Kevin Connors, Vice President of Global Partnerships at NVIDIA (NVDA.US), previously mentioned the launch of the company's first data center GPU, highlighting Super Micro Computer as a key partner. The two companies have jointly developed a working system. According to Kevin, the relationship between the two companies remains "strong."

Evidence of this close relationship was provided in Super Micro Computer's latest quarterly financial report, stating: "The continuous development of NVIDIA GH200 Grace Hopper and Grace Superchips enables it to maintain a leading position in the market."

Furthermore, the report further confirms that Super Micro Computer has established strong relationships with Intel (INTC.US) and AMD (AMD.US). It is worth noting that the company is developing the next generation of AI designs for "NVIDIA H200/B100, AMD MI300X, and Intel Gaudi3."

In terms of demand, Super Micro Computer undoubtedly has a strong market demand.

At the current juncture, the application of artificial intelligence in many areas is driving the demand for data center GPUs. A report by Future Market Insights states that by 2034, the compound annual growth rate of data center GPU demand will reach 32.2%.

Due to Super Micro Computer's strong connections with market leaders, it is reasonable to expect the company's growth trajectory to align with NVIDIA. Additionally, as implied in the quarterly financial report, the company is poised to gain additional business opportunities through its connections with the other two participants in the GPU industry.

Most importantly, the revenue growth shown in the quarterly financial report demonstrates strong demand for the company's products.

Regarding leadership in the market, according to Super Micro Computer's website, Charles Liang founded the company in 1993 and has been serving as the President, CEO, and Chairman of the Board.For investors, this can be seen as a great bonus. Additionally, there are other well-known individuals who have been working at the company for a long time, such as Wally Liaw. With over 30 years of experience in the industry, Liang and Liaw are extremely knowledgeable about the industry. Clearly, both of them are industry veterans and have proven their ability to detect changing trends, as evidenced by Super Micro Computer's current position in the industry.

Lastly, it is always a favorable sign when insiders hold a large amount of stock. In the case of Super Micro Computer, insiders hold 33.09% of the outstanding shares.

On the institutional side, institutional investors also recognize Super Micro Computer.

It is estimated that institutional investors hold approximately 62.14% of Super Micro Computer's shares. This means that a significant portion of the company's ownership comes from entities such as investment institutions, pension funds, and hedge funds.

Boosting the stock is not just that: earlier this month, S&P Dow Jones Indices announced that Super Micro Computer will be included in the S&P 500 Index, a change that will take effect before the market opens on Monday, March 18.

It should also be noted that the proportion of retail investors holding the stock remains very low, at only 4.77%.

Finally, in terms of market performance, the industry in which Super Micro Computer operates remains healthy.

There are countless estimates indicating that the application of artificial intelligence in many industries will see significant growth. The output of Super Micro Computer is expected to continue to grow for a long time in the future, as Huang Renxun, CEO of NVIDIA, has pointed out that artificial intelligence is at a turning point. From this moment on, companies will adopt artificial intelligence tools at a faster pace.

Valuation Considerations

Although Super Micro Computer's valuation metrics have indeed made investors hesitant in many aspects, there are actually quite a bit of data supporting the company.

One of the ratios is the debt-to-equity ratio, which is only 12.2%. The extremely low debt ratio indicates that the company is in good financial condition, and is expected to be able to expand production and research and development in the future, potentially bringing returns to shareholders.

As shown in the table below, many common valuation metrics for Super Micro Computer indicate a lower valuation compared to leaders such as NVIDIA.

NVIDIA's price-to-earnings ratio is significantly higher, but this is in line with its larger market size and brand recognition. However, given that Super Micro Computer has connections with suppliers other than NVIDIA, the company has room for revenue acceleration.A high price-to-book ratio indicates that the company's stock value is higher than its book value. However, Nvidia's price-to-book ratio continues to rise, which likely indicates higher growth prospects.

Lastly, a ratio worth noting is the price-to-sales ratio. This ratio represents the amount investors pay for each dollar of the company's sales. In general, a lower number implies that the company's value is undervalued. This is because it indicates that investors are paying a lower price for each dollar of sales, which may signal a buying opportunity. Based on this figure, Super Micro Computer is significantly cheaper than Nvidia.

Risks

However, as mentioned above, a significant amount of data highlights the current overvaluation of Super Micro Computer.

For example, the current price-to-earnings ratio of the stock is 80.51, far higher than the industry median of 23.12 and the stock's 5-year average of 15.77. Moreover, the news of Super Micro Computer being included in the S&P 500 index has been public for some time, and many investors and institutions believe that the positive factors have been fully priced in.

However, if one adheres to stock selection based on the CANSLIM rule, investing in high-growth stocks and selling at the peak, then it is believed that Super Micro Computer still has significant upside potential before artificial intelligence reaches saturation point.