Super Micro Computer enters S&P 500, rides AI server boom

Super Micro Computer, the latest addition to the S&P 500 as of Monday, stands out in the competitive server market due to its strategic partnership with Nvidia, allowing it to capitalise on the burgeoning demand for AI servers.

The California-based company, known for its swift product launches facilitated by close ties with Nvidia and Advanced Micro Devices (AMD), has emerged as a key supplier of servers crucial for generative AI applications. Its proximity to Nvidia and AMD headquarters enables rapid prototyping, giving Super Micro a competitive edge over rivals such as Dell and Hewlett Packard Enterprise (HPE).

Analysts note that Super Micro can manufacture, assemble, test, and ship a server rack within "a few weeks," provided components are available. The agility in bringing products to market has propelled Super Micro's shares to soar by 289 per cent year-to-date.

With revenue more than doubling in the last quarter of 2023 and expectations of triple-digit percentage growth until at least the September quarter of 2024, Super Micro is poised for significant expansion. Bank of America analysts forecast the company's share of the AI server market to rise to approximately 17 per cent by 2026, up from 10 per cent in 2023.

The surge in demand for AI servers has not only boosted Super Micro's market value to $60 billion but has also lifted shares of Dell by 40 per cent this year. In contrast, HP Enterprise shares have seen a marginal decline of about 1 per cent in 2024.

Despite Super Micro's impressive performance, concerns linger over its lofty valuation, with the company now trading at 40 times expected earnings, a stark increase from its PE ratio of 15 in December last year. Analysts caution that failure to meet future earnings expectations could trigger a selloff.

Moreover, Super Micro is leveraging its proprietary liquid cooling technology to meet the escalating demand for efficient cooling solutions in data centres deploying AI chips. This in-house developed technology, which involves circulating cold liquid over chips to reduce power consumption by 40 per cent compared to air cooling, positions Super Micro as a frontrunner in the adoption of liquid cooling for servers.

(With Reuters inputs)