The arrival of artificial intelligence (AI) into the mainstream has taken the investing world by storm.

AI demands vast amounts of data and immense computing power to perform complex tasks. This has led to a rapid escalation of AI-related stocks, with Nvidia (NASDAQ: NVDA) emerging as a dominant force.

While Nvidia has taken the initial spotlight in the AI space, the sheer size of the market opportunity provides ample opportunities for other companies to thrive. Many companies have forged strong partnerships with Nvidia, enhancing their growth prospects. Among these, Supermicro Computer Inc (NASDAQ: SMCI) stands out as a long-time Nvidia collaborator, offering compelling growth potential for investors seeking to diversify their AI-related investments.

The company’s (commonly known as Supermicro) innovative solutions and strategic positioning make it an intriguing proposition for investors.

About the Company

Supermicro has made a remarkable ascent in the tech industry, driven by the demand and excitement for AI stocks.

Established in 1993, Supermicro has long been dedicated to providing high-performance server and storage solutions, but it is only in recent years that the company has gained widespread recognition. Despite offering products in over 100 countries, Supermicro has been relatively unknown for most of its existence. Nonetheless, its AI equipment has taken Supermicro to the cutting edge of the IT industry, accounting for most of Supermicro’s all-time gains – the share price gaining more than 4,500% in the past 5 years – astonishing when you consider that the current market darling, Nvidia, has returned 3,100% in the same time frame.

Supermicro specialises in manufacturing computer servers and storage solutions, critical components for cloud computing infrastructures. Their product is particularly aligned with AI-optimised cloud environments, which have been a key driver of their recent success. The company’s unique strategy allows it to offer a modular approach to product design, enabling swift customisation to meet the specific technical requirements of its diverse clientele.

Supermicro has expanded its product offerings to include IT infrastructure essentials such as power and liquid cooling systems, further enhancing its market position.

Their high-density equipment is particularly suited to handle the intensive computing demands of AI models, exemplified by applications like ChatGPT. This has positioned Supermicro as a crucial provider in the AI ecosystem, enabling them to capture significant market share and drive substantial revenue growth. Despite its relatively low profile for much of its history, Supermicro’s strategic partnerships with top chip designers like Nvidia have propelled its prominence. The company’s ability to integrate cutting-edge chips into its systems quickly has been a critical factor in its rapid growth.

This capability has enabled Supermicro to deliver tailored solutions at an accelerated pace, meeting the evolving needs of its customers.

The Path Forward

Looking ahead, there are a number of reasons that we believe Supermicro’s growth and customer popularity will continue.

The company continues to experience robust demand for its full rack scale solutions, which incorporate cutting-edge chips from industry giants like Nvidia, Intel (NASDAQ: INTC), and Advanced Micro Devices (NASDAQ: AMD). A significant driver of future growth is its pioneering direct liquid cooling (DLC) technology. AI data centres, with their intensive operations, generate substantial heat—a challenge that is only set to intensify as AI technologies advance. DLC technology effectively addresses this issue, offering a solution that not only enhances performance but also reduces energy costs and environmental impact. Supermicro’s CEO, Charles Liang, highlighted the company’s excitement about collaborating with leading tech firms on DLC solutions, emphasising their critical role in hyper-dense AI rack deployments:

“Supermicro is excited to collaborate with these leading companies on such an exciting project. Our new industry-leading Direct Liquid Cooling (DLC) solutions are exactly the best for hyper-dense AI rack deployments that can lower energy costs and have a smaller environmental impact. The new AI data centre and the companies involved are a great example of the industry’s commitment to green computing and the global expansion of AI.”

Supermicro’s strategic investments in DLC technology are expected to transform it into a mainstream solution for AI data centres and factories. This shift is projected to significantly increase Supermicro’s market share from its current position.

With substantial investment in new facilities and technologies and as more enterprises transition to liquid-cooled infrastructure, Supermicro is well-positioned to capture a significant share of this growing market, solidifying its role as a key player in the data centre industry.

These advancements are expected to drive operational savings and reduce the carbon footprint of data centres, aligning with the industry’s shift towards green computing.

Recent Results

At the end of April, Supermicro reported strong Q3 2024 financial results.

Revenue grew by an incredible 200% year-over-year (YoY) to US$3.85 billion. The company delivered net income of US$402 million an increase from US$86 million in the same quarter of the previous year. Non-GAAP earnings per share increased to US$6.65 while gross margin improved slightly to 15.5% up from 15.4% in the prior quarter.

The company’s strong performance was driven by high demand for AI rack-scale solutions and DLC designs.

Supermicro raised its FY2024 revenue guidance to be between US$14.7 – US$15.1 billion, up from the previously guided $14.3 – $14.7 billion. The company is expected to report its next quarter’s results on August 8, 2024. Supermicro projects net sales of US$5.1 – US$5.5 billion and non-GAAP EPS of US$7.62 – US$8.42.

Additionally, CEO Charles Liang emphasised the company’s leadership in AI infrastructure and expectations for further growth as new solutions, including fully production-ready DLC, ramp up.

The TAMIM Takeaway

While Supermicro is not currently held in TAMIM portfolios it’s strategic advancements and key industry partnerships position it as a significant player in the continually evolving AI market. We believe the current rotation from Mega Caps to small and mid cap equities in the US market will provide an opportunity to enter into a position in Supermicro (and others) over the next few months.

The company’s innovative DLC technology and high-density computing solutions are well-aligned with the growing demands of AI data centres. With substantial investments in new facilities and cutting-edge technologies, Supermicro is set to capture a significant market share. As customers transition to liquid-cooled infrastructure, we believe Supermicro’s ability to deliver efficient, high-performance solutions swiftly will continue to drive its growth.

The company’s ambitious revenue targets and strategic expansions further highlight management’s confidence in the company’s ability to meet the future demands of the AI era, solidifying its role as a leader in AI infrastructure.