Shares of Super microcomputer (NASDAQ: SMCI), also known as Supermicro, surged on Thursday, rising as much as 13%. As of 1:54 p.m. ET, the stock was still up 12.3%.
The decisive factor for the increase in the share of the server and storage solutions specialist was the positive reporting from a major bank.
A street-high price target
Bank of America Analyst Ruplu Bhattacharya initiated coverage on Supermicro and assigned a buy rating and a high price target of $1,040, according to TheFly. This suggests a potential increase of 18% compared to Wednesday's closing price. This forecast comes despite the stock's dizzying rise last year, when it posted an 847% gain.
BofA expects AI-powered demand to continue, driving Supermicro even higher. The analyst also noted that the potential market for AI servers is “much larger” than his Wall Street colleagues’ estimates. The bank believes the market for these AI-centric servers could reach a compound annual growth rate of 50% over the next three years. Given that Supermicro is a leading provider of AI servers, BofA expects its revenue to “grow even faster.”
Are these growth rates achievable?
Investors who question the validity of growth targets in the AI server market could be in for a surprise.
Late last year, Bernstein analyst Toni Sacconaghi pointed out that the server market – which had grown at a compound annual rate of 3% over the previous 25 years – is expected to grow 75% annually through 2027. He suggested that this “unprecedented” build of AI servers could happen “too quickly,” which could eventually lead to a “digestion period” – what analysts call an oversupply. Although his assessment suggests that growth could stall at some point, that point is still several years in the future.
All indications are that sales of Supermicro servers and other digital storage components will benefit even more from the AI tailwind. While the stock currently sells for three times expected sales, that doesn't take into account the company's triple-digit percentage growth rate. Using the more appropriate forward price-to-earnings-growth (PEG) ratio, Supermicro's valuation is 0.4 – and a stock is generally considered undervalued at a PEG ratio below 1.
The story goes on
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
Why Super Micro Computer Stock Rallyled on Thursday was originally published by The Motley Fool