It’s been said that the NASDAQ (NDX) tends to lead the broader stock market, and while this may be true, it works both ways. High-flying tech stocks can be the most vulnerable to steep drawdowns, and today’s rout in Super Micro Computer (NASDAQ:SMCI) stock should serve as a reminder to overeager shiny-object buyers.
What’s the reminder? It’s that hype and hope can reign supreme in the short term, but valuations will matter sooner or later. There’s also a lesson here that trees don’t grow straight to the heavens, as the old saying goes.
Super Micro Computer’s tree grew fast, but today it’s getting chopped down by the market’s lumberjacks. As the weighing machine becomes a threshing machine, highflyers turn into fast crashers and the elevator ride down could actually be faster than SMCI stock’s malfunctioning escalator ride up.
When searching for the “next” NVIDIA goes wrong
For ultra-nimble and extremely lucky stock traders, searching for the “next” NVIDIA (NASDAQ:NVDA) might have gone pretty well for a while. This year, Super Micro Computer stock catapulted from $300 to a mid-March peak of around $1,200.
Escalator rides can be fun, no doubt. As SMCI stock ascended without any resistance whatsoever, the “next” NVIDIA thesis seemed to play out perfectly. After all, artificial intelligence (AI) is still top-of-mind on Wall Street in 2024 and Super Micro Computer specializes in AI-enabled servers.
The next thing you know, Super Micro Computer was added to the S&P 500 and some Wall Street experts were quick to praise the much-touted up-and-comer. Rosenblatt Securities analyst Hans Mosesmann, for instance, highlighted Super Micro Computer as having “developed a model that is quick to market.”
More analysts jumped on the bandwagon, with JPMorgan Chase publishing a $1,150 price target on SMCI stock and Northland analyst Nehal Chokshi one-upping JPMorgan with a $1,300 target. Meanwhile, Super Micro Computer did its part to fan the flames of hype by raising its fiscal 2024 revenue guidance from an already ambitious range of $10 billion to $11 billion, to a substantially higher range of $14.3 billion to $14.7 billion.
Not that every voice on Wall Street was super bullish about Super Micro Computer, mind you. Daring to go against the grain, Aaron Rakers of Wells Fargo (NYSE:WFC) opined that Super Micro Computer stock “will be highly susceptible to any indications of tempering GPU-based server demand.”
Of course, cautionary voices are largely disregarded when bubbles expand. Thus, with Super Micro Computer’s third-quarter fiscal 2024 financial results on tap this month – and the company’s pre-earnings results release expected to occur today or thereabouts – SMCI continued to trade at elevated levels, until it didn’t.
The signs were there
In any bubble, there are always at least a few signs that the proverbial emperor is wearing no clothes. The problem is that, for hasty traders, the signs are only obvious in hindsight.
For one thing, if you thought NVIDIA’s valuation was excessive, you’ll surely be surprised to discover that Super Micro Computer might actually be even more overvalued. NVIDIA’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio of 70.97 is, I’ll acknowledge, quite high. Just to provide some perspective, the sector median trailing P/E ratio is 27.1.
However, Super Micro Computer’s trailing P/E ratio of 72.4 is even higher than NVIDIA’s multiple. It’s also worth noting that Super Micro Computer’s five-year average P/E ratio is 19.64, indicating that the market hasn’t always been over-hyped about Super Micro Computer and other firms with AI-tech connections.
Another red flag, for those who were willing to see red flags inside of a growing bubble, was when Super Micro Computer announced that it would “offer” (i.e., print up and sell) 2 million common-stock shares at $875 apiece. At the time of that disclosure – and despite the share-value-debasement concerns that investors ought to have considered – SMCI stock was in the process of ballooning from $900 to $1,200 in a matter of days.
And finally, here we are, and Super Micro Computer stock is tumbling 18% today. Instead of pre-releasing the company’s Q3-FY2024 results today as investors had anticipated, Super Micro Computer offered no pre-release whatsoever, instead simply announcing the timing of the regular earnings release date as April 30.
Wells Fargo analysts summed up the market’s disappointment, writing that Super Micro failed to provide a “positive preannouncement, which is being considered a negative.” I’d say that’s an understatement and would propose that the well-deserved reckoning for SMCI stock is, to the chagrin of bubble blowers everywhere, now underway.
