- It is not easy to use traditional metrics and find bargain-priced stocks in today's market.
- Super Micro Computer seems to be just that.
- The caution flags seem to be in the rear-view mirror.
- I am targeting 20% annual stock appreciation over the next five years.
Why Super Micro and Why Now:
I have been pretty active in the stock market for years and the stock market has treated me well over the past several years. Who's kidding who, the market has treated everybody well. At the same time, I have been able to beat the market in three of the last four years. At the same time, being active and shopping for bargains has not been easy lately. The market is hitting new highs every week and many stocks are priced at valuations that would have seemed ridiculous historically. So, after searching high and low for my next bargain, I settled on a stock that was already in my portfolio. My pending purchase will make it a core holding. In the balance of this article, I will lay out why I view Super Micro Computer (NASDAQ:SMCI) as a rare bargain in a frothy market.
Super Micro Computer: A Primer
First, because this stock is not well known, I will take a minute to explain the business. Supermicro is a leading provider of application-optimized, high-performance server and storage solutions that address a broad range of computational-intensive workloads. The company is run by its founder, Charles Liang, and has been around for 20 years, and is headquartered in Silicon Valley. Supermicro did get delisted a few years back and was subject to a recent Bloomberg report stating that Supermicro was exploited and hacked by the Chinese government. That report may have held the stock back for a few days but a couple of months later, the stock is sitting at a 52 week high and in my mind, still presents a bargain for medium to long-term investors.
Management is stoked
Numbers matter, they matter a lot, but at the same time, there are some things that can't be measured that matter as well. When I see Liang speak, I have no doubt he is genuinely excited about his vision and the future growth of the company. It is similar to the feeling I had when I wrote about Sleep Number (SNBR) six months ago and that stock has doubled in half a year. When I hear Liang, the excitement is unmistakable. In addition, to ensure that Liang's priorities are aligned with shareholders, his salary is $1 and he does not take a bonus. Liang will receive some option-based compensation if certain stock prices and revenue goals are met over the next five years. It is worth noting that even the lowest level of compensation doesn't kick in until the stock price hits $45, a 13% increase from where we sit today.
The first thing to look at is the traditional price-to-earnings metric. With the market teetering around a previously unthinkable PE of 40, it is refreshing to note Supermicro sports a trailing 12-month PE of 14.69. I would have to believe that valuation will slide up a little bit as time goes on but I am also comforted by the fact that the low PE doesn't come on the back of high=level debt. In fact, the EV-EBITDA ratio is also below 15.
SMCI Valuation Metrics: Data by Y-Charts
Digging further and providing further validation of the financial fortitude of the company, we can see that debt to equity has been trending down in recent years and the company, even in growth mode, has remained cash-flow positive.
SMCI Financial Stability Metrics: Data by Y-Charts
Liang's vision of the future is nothing, if not optimistic. Liang has spoken multiple times about his target of hitting $10 billion in revenue in the next 3-6 years. He is willing to put his money where his mouth is by attaching his future compensation to those numbers. $10 billion in revenue would essentially entail a tripling in half a decade. If that target was hit and the stock price moved lockstep with the revenue increase, the stock price would appreciate to $120. Consistent with those goals, Liang's highest compensation tier comes with the company's stock price hitting $120 within five years. In fact, Liang has stated he hopes to add another set of targets if the stock price hits $120 within three years.
Source: Super Micro Computer IR
Can the Numbers be Trusted?
Let's be honest. No one knows for sure. This is investing. What we do know is that the stock price is up almost 200% since 2018 and still sports one of the lowest valuations around. We also know that the company is batting 1000 over the last four quarters when it comes to beating expectations. Furthermore, the Seeking Alpha database shows that there have been four upward revisions in the last 90 days, another reason for future optimism.
Data Source: Seeking Alpha
Personally, I already had a modest position in SMCI. After doing a fairly thorough search, I was reminded once again that sometimes the best investments are those that are already in our portfolio. I recently put in a bid to buy more in the $39-40 range and sold an April 16th $40 put. If either one of these hits, Supermicro will become a top-five position in my portfolio.
This is a company that sports a modest valuation, a record of consistent growth, and a sound strategy for growth going forward. In addition, the balance sheet is solid and margins have been improving. This is not an especially flashy or dynamic company but it is one that I feel, over a three to five-year timeframe, has better prospects than most.
This article was written by
Analyst’s Disclosure: I am/we are long SMCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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