SMCI Thoughts & Analysis: Huge move after hours on the news that they will be added to the S&P500 along with Deckers. Here's my thought on SMCI going forward, both for the short term and long term.
The 6 mos. chart is at the bottom of the post and I didn't choose a year as the timeline because all the magic started in December, including a parabolic move, a big sell-off and a move higher. I did benefit greatly recently with a well timed call purchase but I also wanted to take a small piece in the form of a long position which I have been building slowly, but to a reduced weighting in the portfolio.
SMCI will be added to the S&P Index on 3/18 when the index rebalances, with last trading day being being 3/15.
At significant play here we have a meteoric growth in both top and bottom line into a very low (47.5M) float (available shares). This low float and the increasing short position, somewhere between 10-12%, in combination with the S&P news sent the stock soaring AH by 12.5% to $1,019.
Forward valuation is somewhat all over the place but I now have it in the low-to-mid 30s, very respectable given the last quarter's numbers. A Barclay's estimate has SMCI at 7% of the rapidly expanding server market before increasing manufacturing to increase market share going forward. I saw one estimate of the server market to be $177B in revs by 2032, a dramatic increase over last years $38B. I have not independently verified these numbers but they jive with what I've seen elsewhere.
Fiscal 2023 earnings of $11.81 per share could rise in the range of $80 - $90 per share over the next 5 years, providing a long term (5 year) multiple of just under $13 when using the mid-point of $85 per share. Should that come to pass, and using a realistic premium laden multiple of 30-35, there's a current share price range of $2,550-$2,975. Obviously that assumes a level of linear and continued growth which may or may not be realistic. Should SMCI continue to take market share, these estimates could be light. Should they misstep or fall to more competition, they could be aggressive.
My Primary Risk Factors
There are three primary risk factors I'm trying to get my arms around and, unfortunately, in this very dynamic space, it's going to be a wait-and-see approach. Here are my primary risk factors:
1) Reliance on Nvidia - As SMCI is selling high end server solutions tied directly to Nvidia's chip lineup, any impact to that supply or relationship will be material. This could be good or bad at today's price. I have yet to see a % of revenues attributed directly to Nvidia units that I'm comfortable reporting on.
2) Gross Margin - SMCI has a low gross margin, most recently 15.4%, down from the high 18% range in the year-ago quarter. This has been attributed to the company wanting to take market share. I don't like seeing low margin businesses in general and reducing gross margin created other risk factors. If the company is just striking when the market is hot to increase share, okay. We'll see in future quarters.
3) Too-far-too-fast and Float - At less than 48M in available shares (float), this stock is going to be whipped around like none other ... or at least few others. It'll be a roller coaster. For long term investors, it may be a moot point as market expansion, top line growth, bottom line growth and split factors could make SMCI a huge winner. But along the way, many landmines and short-term market events are going to make holdign this stock a live-fire exercise. For traders, this stock is going to continue offering substantial short-term opportunities. I can't say I wouldn't play this along the way as well, but that is not my focus.
The positive Catalysts are many and all wrapped up in their recent meteoric growth, relatively low valuation into that growth, that same low share count and their place within the landscape. They are not a fly-by-night company with an unproven concept, but instead, a verifiably expanding market presence who is now hitting on all cylinders. I could make a strong case for SMCI to be valued at $300/shr. or $3,000 per/shr. It's all about your risk tolerance.
My Current Plan
I had a huge gain on a short-term Call play when SMCI dove out of $1,100 down to $700. If you're a trader on SMCI, it's a fool's folly to try and single-position play the move. It moves too fast and none of us, me included, will find a perfect bottom. If you try to use 100% positions, you will be very exposed. I cannot underscore this fact more.
I am building a relatively low-weighted position in my primary account made up of multiple small purchases (I'll update that in another post). All my years of trading experience make it impossible for me not to seek taking advantage of significant valuation events for SMCI along the way, but that is not my primary focus and I'm not force trades here. My focus remains on the long term.
I have reached my first goal of a 1.5% position on SMCI based on what I've seen thus far. I'm not against taking the position to 2.5% as a "best idea" for a more fundamentals-based speculation play, but that weighting will not be realized in the near term. This stock is too much in flux.
In short, I've seen enough to be very intrigued by SMCI and the fact that I've taken the position to 1.5% already says a lot. My goal is to build the shares over a longer period of time and allow market mechanics to do the rest while their profitability and growth play out. Given their inclusion into the S&P, and even before this, they are without question a split candidate. I would be surprised if the first split doesn't happen within the next few months on the magnitude of 10:1 for greater share liquidity. To be honest, given the S&P inclusion, I'm surprised the shares have not been split. It's not out of the question they could fast-track that but less than three weeks doesn't seem plausible. But it may be. In any case, it's a when-not-if situation at the current valuation.
My hope is to hold this position for the next five years and monitor their maturation/growth along the way. It's pretty much that simple. On the road to that hold, I will also trade around the position when given the opportunity, most likely in the form of Call positions off of material downside share price events. With the low-float attribute, opportunities should abound. If you plan on doing this as well, I would strongly recommend averaged-in position Call trades and not near-term weekly options. Options are gambling as is and weekly or 0DTE positions are pure gambling. Keep stops very close to reduce loss potential.
Conclusion
I'll say it rather plainly: SMCI has burst onto the scene in a way that I have to take advantage of on the chance that they cement their position in the burgeoning AI-induced build-out of data centers and generative AI usage. Without question, the continuation of growth in this area is ordained. SMCI's place on the landscape is not but it is impossible to not be impressed with what they have accomplished thus far. Their model and execution is enough for me to take the position and wait it out.
Good luck out there. Build small and over a longer period of time. Always look out for a change in the story and react accordingly.
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