Although Super-microcomputer (NASDAQ:SMCI) has been one of the top stocks on the market over the past year, with a share price increase of 123% – but the server and storage solutions specialist’s shares have also been susceptible to volatility. This is reflected in the 37% drop in its share price since the beginning of March, with shares giving back a large portion of their previous gains.

Furthermore, Supermicro’s recent results for its fourth quarter of fiscal 2024 (ended June 30) seem to have further dented investor confidence in the stock due to a huge earnings miss. The company has struggled with growth issues as it tries to capture a larger share of the fast-growing artificial intelligence (AI) server market, but the numbers show us that it is actually succeeding in its quest.

So, will Supermicro stock be able to regain investors’ confidence and make further gains in the coming year? Let’s find out.

Recent forecasts indicate further upside potential

Supermicro closed its last fiscal year with revenue of $14.9 billion, a huge increase from revenue of $7.1 billion in fiscal 2023. The company’s non-GAAP net income also increased in the last fiscal year, to $22.09 per share from $11.81 per share in the previous year. This huge increase in Supermicro’s revenue and profits was due to booming demand for its AI servers.

In the recent earnings call, Supermicro management stated, “Growth was driven by strong demand for next-generation air-cooled and direct liquid-cooled (DLC) rack-scale AI GPU platforms, which account for over 70% of revenue in the enterprise and cloud service provider markets, where demand remains strong.”

The company could have ended the year with stronger growth, but a shortage of components for its DLC servers prevented it from reporting higher revenue and profit growth. More specifically, Supermicro says $800 million worth of shipments were pushed back to July. However, looking at the bigger picture shows that the outstanding growth Supermicro achieved in fiscal 2024 will continue in the new fiscal year.

The company has forecast revenue of $28 billion for the current fiscal year. The upper end of the forecast range is $30 billion, suggesting that Supermicro has the potential to double its revenue again this fiscal year. The company says it ended last quarter with a record-high backlog, so there’s a good chance it could actually hit the upper end of its forecast range, especially considering it plans to bring a new manufacturing facility online in Malaysia sometime in 2024.

The story continues

Supermicro is also betting big on growing demand for DLC servers, which are designed to help data center operators reduce their energy costs by as much as 40% while improving computing performance. Management expects that 25% to 30% of new data centers coming online worldwide in the next 12 months will likely opt for DLC servers, “with the majority of those servers coming from Supermicro.”

Because of this, Supermicro has decided to quickly add more DLC server rack capacity, which will impact short-term profitability and margins. But in the bigger picture, these short-term growing pains should ideally pave the way for long-term gains, as the share of liquid cooling in data centers versus air cooling is expected to rise from 13% last year to 33% in 2028, according to consulting firm Omdia.

In addition, Supermicro’s rapid growth suggests that the company is capturing a larger share of the AI ​​server market. Bank of America estimates that Supermicro’s market share in the AI ​​server market could increase from 10% last year to 17% in 2026. However, other analysts seem more optimistic about the outlook. Thomas Blakey of KeyBanc Capital Markets believes that Supermicro’s market share in the AI ​​server market could reach 23% this year.

It will come as no surprise that Supermicro’s AI server market is actually on the growth side. Market research firm TrendForce expects AI server revenue to rise 69% this year to $187 billion. The company predicts that demand for AI servers will continue into 2025. Supermicro’s customers include NVIDIA And Advanced micro devices Introduction of new generations of data center chips, which could drive the need for more liquid-cooled server solutions.

How much upside potential does the stock offer in the coming year?

The above discussion suggests that there is a strong chance that Supermicro’s revenue in the new fiscal year that has just begun will approach the upper end of its forecast range. Assuming Supermicro does indeed achieve revenue of $30 billion in fiscal 2025 and trades in line with the company’s price-to-sales ratio of 2.8 times S&P500 Index (of which it is a part), its market capitalization could rise to $84 billion within a year.

That would be a big jump from the current market cap of $33 billion. What’s notable here is that Supermicro currently trades at 2x sales, which is below the S&P 500 average. Assuming the stock continues to trade at that multiple after one year and manages to generate annual sales of $26 billion – the low end of the sales forecast – the market cap could be worth $52 billion.

That would be a 57% increase in market capitalization from current levels. So investors looking to add a growth stock to their portfolios that trades at an attractive price may consider buying Supermicro while it is trending down and still cheap. It could regain its momentum and deliver solid gains in the coming year.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan does not own any stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices, Bank of America, and Nvidia. The Motley Fool has a disclosure policy.

Where will Super Micro Computer stock be in a year? was originally published by The Motley Fool