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1 Stock-Split AI Stock to Buy Before It Soars 185%, According to a Wall Street Analyst

1 Stock-Split AI Stock to Buy Before It Soars 185%, According to a Wall Street Analyst

Server manufacturer Super Micro Computer (NASDAQ: SMCI) hit its stride last year as demand for artificial intelligence (AI) hardware built momentum. The stock has surged 550% since January 2023, and the company has been added to the S&P 500 and Nasdaq-100 indexes.

Supermicro reported somewhat disappointing financial results earlier this week, which sent the stock into a tailspin. But management gave investors at least one piece of potentially positive news: The company will complete a 10-for-1 stock split in late September.

I call that news potentially positive because it could help Supermicro beat the market. Since 1980, the average stock has returned about 25% during the 12-month period following a stock-split announcement, while the S&P 500 has returned 12% over the same period, according to Bank of America .

Wall Street is more optimistic. Supermicro has a median 12-month price target of $995 per share, which implies 89% upside from its current share price of $527. And the most bullish analyst, Ananda Baruah at Loop Capital, thinks the stock could surge 185% to $1,500 per share.

Here's what investors need to know.

Super Micro Computer is the market leader in artificial intelligence (AI) servers

Supermicro manufactures high-performance computing platforms, including servers and storage systems. Engineering expertise and modular design allow the company to bring new products to market quickly, making Supermicro the go-to provider for artificial intelligence (AI) servers.

To elaborate, the company handles most research and development (R&D) and server assembly internally at facilities in Silicon Valley. This enables "rapid prototyping and product roll-out." Supermicro also has a unique approach to product development whereby it utilizes common building blocks to assemble a broad range of servers.

That gives customers flexibility in designing custom computing platforms and allows Supermicro to quickly build products with the latest chips from vendors like Nvidia and Advanced Micro Devices . The company typically beats competitors to market by two to six months, according to CEO Charles Liang.

That advantage should keep Supermicro on the leading edge of the AI server market. Analysts at Bank of America expect its market share to reach 17% by 2026, up from 10% last year. Tom Blakely at KeyBanc is even more bullish. He says Supermicro's market share could exceed 20% this year and believes the company has "competitive moats that should sustain if not expand this share in coming years."

Other analysts are less optimistic. Matt Bryson at Wedbush Securities believes other server makers, like Dell Technologies and Hewlett Packard Enterprise (both of which are much larger than Supermicro), could emulate its modular product development, thereby negating its time-to-market advantage.

Supermicro failed to impress Wall Street with its latest financial report

Supermicro reported mixed financial results in the fourth quarter of fiscal 2024 (ended June 30). Revenue surged 143% to $5.3 billion, narrowly beating estimates, on record demand for AI infrastructure. However, non-GAAP net income increased 78% to $6.25 per diluted share, but Wall Street expected adjusted earnings to grow 130% to $8.14 per diluted share.

Wall Street was particularly disappointed with margins. Supermicro reported a gross profit margin of 11.2% in the fourth quarter, down 5.8 percentage points from the same quarter last year. This margin compression could signal a lack of pricing power, which could cause earnings to grow more slowly than anticipated in future quarters. That concern caused shares to fall 13% following the report.

However, management attributed the margin crunch to costs associated with expedited shipping of direct liquid cooling (DLC) components. Supermicro aims to position itself as a leader in DLC, which should become increasingly necessary as businesses deploy more AI servers. CEO Charles Liang believes gross profit margin will return to normal levels (14% to 17%) toward the end of fiscal 2025 as manufacturing capabilities reach scale. Investors should monitor the situation closely.

Management provided some good guidance. Supermicro expects revenue to increase more than 200% in the current quarter, due to a record backlog. "We are well positioned to become the largest IT infrastructure company, driven by our technology leadership," CEO Charles Liang told analysts.

Supermicro shares look cheap in relation to Wall Street's projected earnings

The AI server market is projected to grow quickly in the coming years, though estimates vary widely. Morgan Stanley analysts believe AI server sales will triple by 2030, while JPMorgan Chase analysts believe the market could increase more than sixfold by 2028. Either way, Supermicro has a significant tailwind at its back, and the company could create substantial value for shareholders if its gross profit margin improves.

Wall Street expects Supermicro to grow adjusted earnings by 51% in fiscal 2025 (ending June 2025), but that figure includes a wide range of individual estimates. The most bearish forecast calls for 22% earnings growth, and the most bullish forecast calls for 76% growth. If the Wall Street consensus is correct, the current valuation of 24 times adjusted earnings seems quite reasonable. Anything above that only solidifies the case for owning the stock.

As a caveat, Supermicro shares currently trade 55% below their record high, and a substantial portion of that correction took place in recent weeks. But shares could tumble further if the company misses consensus earnings estimates in the coming quarters. That very circumstance caused the stock to plunge after the company issued its latest financial report.

Before you buy stock in Super Micro Computer, consider this: