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SuperMicro: Rise of a Tech Industry Underdog

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Tucked away off one of the main freeways in Silicon Valley are a group of non-descript, off-white buildings with the name SuperMicro on the front. While not as well-known as rivals Dell Technologies Inc. or Hewlett-Packard, SuperMicro has carved out a reputation in the tech industry for its customizable servers and partnerships with major chip makers like Intel Corp., Advanced Micro Devices Inc., and Nvidia Corp.

Founded in 1993 – the same year as Nvidia – SuperMicro is currently seeing a surge of interest in its servers as generative AI applications grow in popularity. Its stock has risen over 400% from a year ago, with shares hitting an all-time high of $261.60 earlier this year. Despite falling back slightly in recent days to around $222 per share, SuperMicro’s success story is far from over.

SuperMicro operates out of a fairly large corporate campus split out over twelve different buildings. Ridder Park Drive – once the site of the San Jose Mercury News’ headquarters – is now home to one of SuperMicro’s facilities. Here, SuperMicro conducts its operations, manufacturing, testing, and assembly for its servers.

Though 2018 saw SuperMicro temporarily delisted for financial reporting issues, the company has since rebounded and is making waves in the tech industry. With AI technology on the rise, SuperMicro’s customizable servers and partnerships with big-name chip makers make it one to watch as the company looks to further establish its place in Silicon Valley.

SuperMicro: Building-Block Solutions for the AI-Driven Cycle

SuperMicro has caught the attention of Rosenblatt Securities analyst Hans Mosesmann, who initiated coverage of the company with a ‘buy’ rating, noting that it fits within the AI-driven, secular cycle they call the ‘Mother of All Cycles.’

Co-founder, President and Chief Executive Charles Liang shared that he is not surprised by the recent rise in the company’s shares and market valuation, acknowledging that the stock was undervalued for too long. He attributed the de-listing to negligence and assured that the internal controls and late-filing issues raised by regulators have been addressed.

SuperMicro specializes in building-block solutions for the computer industry, data centers, cloud-computing services, and numerous corporate enterprises, offering motherboards, servers, and big racks of massive computing power.

Leveraging its sustainability initiative, SuperMicro has been leading the way in green computing for almost two decades. Its innovative approach has saved server owners hundreds of thousands of dollars annually in electricity costs. With AI servers demanding even more power, the company now offers water cooling as an option.

Diversifying its manufacturing capability during the global supply-chain crisis of the pandemic, SuperMicro is building a new facility in Malaysia to provide lower-cost manufacturing. Keeping up with the ever-changing demands of emerging technologies, SuperMicro remains an industry leader.

SuperMicro Aims for Sustainability and Growth

SuperMicro is making strides in both sustainability and market growth. The company has been utilizing Bloom Energy fuel-cell servers since 2018, providing most of the energy use in its “Green Computing Park.” CEO Charles Liang has also established a non-profit called the Green Earth Charitable Organization, which focuses on planting drought-tolerant trees around the world to reduce carbon emissions. The organization recently acquired a nearly 200-acre ranch in nearby Milpitas, California, where more trees will be planted.

As of 2022, SuperMicro was the fifth-largest computer server maker in the world, with a 5% share of the $118 billion global server market. Its growth rate of 80% year-over-year was the fastest among the top companies such as Dell, Hewlett Packard Enterprise Co., Inspur and Inspur Power Systems, and Lenovo Group Ltd. SuperMicro attributes this success to its close relationships with customers and partners in Silicon Valley, where half of its almost 5,000 employees work. The company’s ability to optimize servers for specific customer needs has also contributed to its rapid growth.

SuperMicro: The Customization Leader in Server Market

SuperMicro is well-known for its specialization and customization services in the server market. IDC analyst Kuba Stolarski likened the company’s approach to Dell’s early days, where they offered consumers a vast array of customization options, making it possible to order a Dell PC in almost any configuration. Similarly, SuperMicro provides a printed catalog so extensive that it’s the size of a phone book, with countless parts, components, and options available for customers. Known for its quick delivery times, SuperMicro is the go-to company for customers who know exactly what they need.

Liang, the CEO of SuperMicro, noted that his company was the first to release servers containing Intel’s newest-generation server chip, Sapphire Rapids. Being neighbors with Intel, AMD, and NVIDIA has provided SuperMicro an enormous advantage, allowing them to be the first to receive shipments of new CPUs and GPUs, often before their competition. This proximity provides shorter lead times resulting in earlier product delivery compared to other server providers.

While SuperMicro’s annual revenue growth almost hit 60% in calendar 2022, they had a disappointing quarter in their most recent fiscal year. Revenue jumped by 46% for fiscal 2022 ending in June 2022. The company advised investors of upcoming revenue shortages in March due to component supply chain issues; however, they bounced back when they released their sales guidance in May, and investors were impressed by the demand for their servers’ generative AI capabilities.

SuperMicro Sees Revenue Growth Driven by AI and Rack-Scale Solutions

SuperMicro has reported that 29% of its revenue from the March quarter came from AI GPU and rack-scale solutions. However, the company has also warned that there may be constraints due to supply-chain bottlenecks caused by high demand.

Despite these issues, SuperMicro has delivered strong projections for revenue growth for its fourth fiscal quarter of between 6.25% and 18.75%. Moreover, the company is anticipating at least 20% revenue growth for fiscal year 2024. CFO David Weigand describes these projections as conservative, with the expectation that accelerated computing and large-language models will drive growth.

While some investors have confidence in SuperMicro’s projections, there remain some doubters. For example, prior to this year’s run-up in January, short-seller Spruce Point Capital Management issued a report outlining concerns about the company’s long-term revenue goals and past delisting, as well as material weaknesses in its financial reporting. Spruce also raised questions about SuperMicro’s family connections with two manufacturing partners in Taiwan, as detailed in the company‚Äôs 10-K.

Investor Skepticism on SuperMicro’s Valuation

Investors have expressed concern over SuperMicro Computer Inc.’s valuation, which they believe is overinflated. Ben Axler, the founder and chief investment officer at Spruce Point, stated that “selling server hardware…is a low-margin value proposition.” He also expressed interest in whether SMCI can deliver on its current growth assumptions.

SuperMicro has also suffered from a lack of clear succession planning, as disclosed in its 2022 annual report. The absence of a clear plan, especially with the company’s CEO, Liang, being 65, could pose significant problems for the implementation of its growth strategy.

Liang acknowledges the importance of succession planning but has not shared any concrete plans. In his free time, he’s taken up working on his non-profit and researching different species of trees.

Wall Street analysts have also expressed concern about the company’s projections and its heavy reliance on a single customer that contributes over 10% of its revenue. While many speculate that this customer is Meta Platforms Inc., SuperMicro has refused to confirm its identity.

Even with its ambitious growth forecasts of over 20%, some analysts are skeptical about the impact of macro pressures on the company’s traditional enterprise compute business, as well as the pessimism surrounding new CPU product rollouts. The scope of the Meta business also poses potential headwinds if it doesn’t meet expectations this year.

Silicon Valley’s New AI Hope

Decades of research into artificial intelligence yielded little commercial success, until the arrival of ChatGPT last year. This breakthrough has breathed new life into the tech hub of Silicon Valley, with companies like SuperMicro reaping the benefits.

After 30 years of existence, SuperMicro is finally getting its chance in the sun. However, with the sudden surge in interest and investment, investors are left to wonder – is it too much, too soon? Only time will tell.

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