Supermicro: AI's Midas Touch
When your stock rallies 1,200%, there's no way it is a fluke. Right?
Nothing has been the same since ChatGPT dropped in late 2022. Going into 2023, execs at all big companies witnessed the virality of the chatbot and felt the FOMO bigtime. Soon enough, the gathered around the boardroom and decided it was time for them to hop on the bandwagon.
Since then, investments in AI and computing have propelled the market to new heights. Over the past 2 years, the S&P 500 rallied over 2,000 pts - from around 3,500 to past 5,500.
This market rollercoaster has brought a few names to the forefront. As the world tried to make sense of the storm, names like NVIDIA, AMD, TSMC, and ASML quickly gained notoriety. After all, anyone with a pulse over the past year has heard about the astronomic rise of NVIDIA. And then there’s the story of the little engine that could - and very much is - SMCI.
Super Micro Computer Incorporated - an enterprise server company - has been on a tear since the end of 2022. Before recent declines, the stock rose over 1,200% over the past 18 months.
That’s until recently - SMCI took a major hit last week. Hit with a major short report from Hindenburg Research for allegations of improper revenue accounting, the company tanked over 25% during the trading session.
Something must be intrinsically driving the company up. How did this no-name company doing $11 billion in revenue rise to over $60 billion in market cap? Let’s dive into SMCI’s competitive advantage in the enterprise computing industry.
The Server Market
Supermicro is a global technology leader committed to delivering first-to-market innovation for Enterprise, Cloud, AI, Metaverse, and 5G Telco/Edge IT Infrastructure. We are a Rack-Scale Total IT Solutions provider that designs and builds an environmentally friendly and energy-saving portfolio of servers, storage systems, switches, and software, along with global support services.
This sounds like a lot of buzzwords. Basically, SMCI provides everything related to servers for companies that want to build out their data centers. Server racks, storage, networking, and all the small components that are involved in data centers - a “Rack-Scale Total IT Solution”.
With all the hype around the stock, you’d assume they must control the market. But SMCI is literally the underdog on the block. Competitors in the infrastructure industry include Dell with EMC, HPE, Foxconn, and others. SMCI only has a 5% market share, compared to Dell’s 51% or HPE’s 14% market control.
Regardless, SMCI is a lean machine. Think about their largest US competitors. Dell, HP, and Lenovo weren’t originally enterprise server suppliers! Each of them started out as a consumer technology company and rode that wave through the dot-com bubble. Now, those divisions exist as mandatory deadweight. They do nothing other than bloat and pollute the margins of a lethargic and slow-moving company.
SMCI shines here. Even after laying off 10% of its staff recently, Dell has over 100,000 employees. SMCI can develop, build, and ship their maximum production with only 5,100 employees. In financial terms, SMCI’s operating costs are only around 3-5% of their overall revenue. Dell’s is much more than 10% - a key figure when gauging the outflows of the company’s revenue.
Modularity
Current CEO Peter Liang co-founded the company with his wife back in 1993 - a time when titans walked around in Silicon Valley. To establish any presence, SMCI had to double down on its competitive advantage - size and speed. “Design the best product” Liang believes. If our product isn’t the best, how do we compete with others?
Innovate or die - A common phrase you hear in Silicon Valley, but even more apparent as a small operation. SMCI targeted PCs out of the gate but quickly observed the saturation in that market with Apple, Dell, HP, and others controlling the market.
“Thirty years ago, when I designed our product based on building-block architecture, I did not know it would be as powerful as it is today”
In hindsight, getting ousted from the personal computer market was a boon for SMCI. Liang saw past the consumers, straight into the real golden goose - enterprise. Over the next 30 years, SMCI would develop on two parallels - modularity and green computing. Unlike their competitors, SMCI offers what they call a “Rack Scale Plug-And-Play” solution - a hot-swappable server rack that can support changes when there are improvements in the industry.
Isn’t it all coming together now? SMCI rallying 300% just YTD makes so much more sense knowing that the company’s core competency is literally to build server racks that are excellent in accommodating improvements in the computing industry.
For training massive foundational AI models, Supermicro is prepared to be the first to market to release NVIDIA HGX B200 8-GPU and HGX B100 8-GPU systems.
Before NVIDIA even unveiled its newest chip in March - the Grace Hopper - SMCI was prepared to unveil their liquid-cooled solutions to support the newest NVIDIA GPUs. Being so close to the largest GPU manufacturers helps SMCI work in lockstep with the leaders - accelerating time to market and innovation for the next-generation server.
Being a tiny player isn’t even really hurting them. When addressing their new liquid-cooling server racks, Liang mentioned how they can produce over 1,000 new liquid-cooled racks monthly - something for which they already have a backlog. Overall, however, the company pumps out over 5,000 full-scale racks every month.
SMCI’s core competencies - being lean and modular - are at the crux of what drove the stock up multitudes during the AI wave. If Liang sticks to these strengths, the argument could even be made that SMCI is undervalued. Let me know your thoughts in the comments below!
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