The S&P500 (^GSPC 0.47%) is the most widely followed index in the United States and consists of the 500 largest companies in the country. Due to the breadth of its membership, it is considered by many to be the most reliable indicator of the overall performance of the stock market.

To be included in the S&P 500, a company must meet certain criteria:

• Be based in the USA
• Have a market capitalization of at least $8.2 billion
• At least 50% of the issued shares must be available for trading
• Must be profitable in the last quarter according to generally accepted accounting principles
• Overall, a profit must be made in the last four quarters

Super-microcomputer (SMCI -0.23%)also known as Supermicro, is one of the most recent additions to the S&P 500. It joined in March and is one of only eight companies added to the index so far this year.

In addition, the AI-centric server maker recently announced a 10-for-1 stock split, which is typically reserved for companies that have demonstrated strong operational and financial results for years. Since the start of 2023, Supermicro shares have risen 500% as the rapid adoption of generative AI boosted the company’s revenue and increased its profits.

Despite the steep gains, many on Wall Street believe there is more upside to come. Let’s look at what sets Supermicro apart from other companies and whether the stock is worth buying.

Image source: Getty Images.

Catapulted to stardom

Supermicro has been developing custom server solutions for about three decades, but that experience meant that customers wanted its services when generative AI came on the scene early last year. The company offers a variety of servers and storage systems, from plug-and-play rack-scale systems to modular building block components.

The company also offers support services to help customers “install, upgrade and maintain their computing infrastructure,” a regulatory notice said.

Management also cites strong partnerships with all major chip manufacturers as a competitive advantage, as this ensures Supermicro is always supplied with the latest and greatest processors. In addition, the company’s focus on energy efficiency has become an important theme during the AI ​​boom.

Last year was a year of transformation for Supermicro. In fiscal 2024 (which ended June 30), revenue of $14.9 billion grew 109% year over year, while earnings per share (EPS) of $20.09 rose 76%. Management points out that revenue grew five times faster than the industry average over the past 12 months, showing that the company is gaining market share over its competitors.

However, this unprecedented growth spurt has not come without challenges. Last quarter, the company came under significant pressure on its margins, which it attributed to a change in product mix and a shortage of certain server components, which pushed $800 million in revenue into the next quarter.

Chief Financial Officer David Weigand addressed the issue, saying, “We have a path to improve gross margins to the target range of 14 to 17 percent by introducing innovative platforms based on several new technologies from our strategic partners and improving the manufacturing efficiency of our direct liquid cooling (DLC) solutions.” It is clear that management views this as a short-term issue.

The company has also been working to keep up with demand by expanding its existing manufacturing capacity and bringing new facilities online. These moves will enable Supermicro to generate $50 billion in revenue in the coming years, up from $15 billion this year.

If the company can overcome its growing pains, there is a good chance that the stock will resume its upward trend.

Analysts remain optimistic about Supermicro

There is rarely a consensus on Wall Street, so it’s notable that the majority of analysts covering the stock believe there is still significant upside. Of the 17 analysts covering the stock in July, 12 maintain a buy or strong buy rating, and none recommend selling. An average price target of around $1,000 suggests they believe the stock could be worth more than double from Wednesday’s closing price.

However, Loop Capital analyst Ananda Baruah is even more more optimistic than its Wall Street peers, giving it a buy rating and a price target of $1,500. This suggests a potential gain for investors of 204% from Wednesday’s closing price.

The analyst points to Supermicro’s leadership in “both complexity and scale.” Baruah also said the company could more than double its revenue to $40 billion in the next two years.

Despite the stock’s meteoric rise since the beginning of last year, the price is still attractive. It is trading at around double sales, which is exactly the definition of a fairly priced stock.

For investors who can take some extra risk and stomach volatility, Supermicro appears poised to take the AI ​​revolution to the next level, which could provide shareholders with rich rewards along the way.