Earlier this year in April, I warned investors that the artificial intelligence (AI) industry has put Super Micro Computer (NASDAQ:SMCI) stock on too high of a pedestal, making it inevitably overvalued. Since then, the stock has lost 45% of its value but is still up 135% year-to-date (YTD). For investors, the company’s new 37x price-to-earnings ratio approaching the Q2 earnings call on August 6 might represent an exciting investing opportunity. But consider a few factors before buying the stock, even at this hefty corrected price.
The first is whether or not it can replicate the magic of its first-quarter earnings report. Investors saw key metrics like revenue, net income and diluted earnings per share grow by 200%, 368% and 328%, respectively. The second is whether or not its vast and highly specialized network of data center computers will be relevant in the event of an AI bubble crash similar to the dotcom bubble of the early 2000s. Answering these two questions is key to determining if SMCI is a buy ahead of its second-quarter earnings report.
Does Lighting Strike Twice?
Oftentimes, companies in the tech sector will see a novel application of their product cause their stock to soar. In many ways, this is what happened to SMCI stock at the beginning of the AI boom. Companies researching the technology realized the massive data center infrastructure solutions that it had built over the years could be repurposed to accelerate AI training. That’s because SMCI partners directly with GPU industry leader Nvidia (NASDAQ:NVDA) to package its products in the most processing-efficient ways for data center integration.
As a result, SMCI’s data center rack scale solutions offer some of the fastest linear processing speeds on the market, though they’re not publicly available from the company. For investors, this spike in demand for its Nvidia-supported data center computers marked a feverish rally up to $1,200 a share on the back of quarter after quarter of financial growth. But much like its partner Nvidia, SMCI could start to see demand dry up, which has been hinted at as consumers begin to question the merits fo AI.
Is There An AI Bubble and Is SMCI Safe?
There has yet to be a unified consensus on the nature of the AI industry’s valuation. Some analysts claim the exuberance around AI products is justified while others are dubbing it a second dot-com bubble. From a rational standpoint, AI products, while beginning to see some adoption on the corporate level, are not yet a central part of the average consumer’s day-to-day. For example, the dot-com era ushered in a new platform that connected the whole world. And then it became a critical part of the ways humans do business, communicate and even learn.
Currently, AI hasn’t achieved those same feats. But stocks are still in the early cycles of the boom. Essentially, the current selloffs SMCI is experiencing could be more of a profit-taking sign than a panic.
If there is a bubble, and it pops, SMCI will likely see its gains wiped out as it retreats toward its previous 52-week low of $226. If we’re not in a bubble, and the value derived from AI stocks truly justifies the price. However, with the Buffet Indicator, a metric that takes the total U.S. stock market value and divides it by the annualized gross domestic product, reaching over 200% in recent months, it’s likely the whole market remains overvalued, making the values AI stocks are experiencing unlikely to be justified.
Should You Buy SMCI Stock at its Current Price?
On one hand, we’ve seen Super Micro Computer stock handily reach $1,200 on the back of a successful earnings report. So, with one coming up on August 6, it’s possible the stock could see another rally following impressive revenue and income growth. Conversely, its current price near $625 seems a tad expensive looking at its 37x price-to-earnings ratio. But that number is on par with the broader industry average. So it’s not enough to call it overvalued anymore.
Rather, the current price for such an influential company seems fair, even if the market trades broadly overvalued. As such, buying SMCI stock and other high-profile AI stocks now comes down to the broader AI industry outlook. If you’re still bullish on AI after this latest dip, then SMCI is a buy at its current price. If you’re bearish that AI is the next dot-com crash but worse, then you’ll naturally steer clear of one of the biggest companies driving the sector’s growth.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.