Super Micro Computer (SMCI): Undervalued Tech Titan With 2x Upside Potential

They say you only get once chance to make a first impression. In the case of Super Micro Computer (SMCI) a $31 billion technology company that delivers computer server products in the United States and globally, there might just be a second crack at turning investors into raving fans.

SMCI corporate overview. Source: company website

I could not stop laughing the first time I heard about this stock in detail. It was because of how a market commentator described it. Referencing the classic series “The Sopranos,” SMCI’s company name was likened to a stock that might have been pitched by Christopher Moltisanti, the volatile nephew of mob boss Tony Soprano, when he ran a boiler room stock brokerage operation for the family. “Sir, you need to buy this. It’s called Super Micro Computer.” Hilarious.

Volatile also describes SMCI’s recent history. While it has been in business since 1993, the California- based company was little more than a microcap penny stock type as recently as 5 years ago. But it burst on the scene, produced the eye-popping 1,800%+ return since that time, and was on the typing fingers of every meme stock trader.

SMCI trailing returns. Source: Barchart.

But alas, 2024 brought a delinquent filing of quarterly reports, a resignation by Ernst & Young, SMCI’s auditors and investigations by the Department of Justice (DOJ) and the Securities & Exchange Commission (SEC). And we all know, DOJ plus SEC equals this:

SMCI peak to trough decline. Source: Ycharts.

That 85% price drop in only 8 months likely took SMCI off a lot of trader radars. And since I’m a technical and quantitative trader, not a fundamentals-driven one, when I see a chart like this, I suddenly stand at attention.

SMCI daily chart. Source: Barchart.

That daily view above covers the last year, including the tumult mentioned, as well as SMCI’s 100% gain and full retracement of that move, from after February began through before April ended. That’s a lot of drama.

However, for those investors new to the stock, or who are willing to take a fresh look, the weekly chart is even more compelling. I see a stock trying to build a very nice base, and with another doubling to the $100 area at least a realistic target. How long it might take, how volatile it will be along the way, and whether the current up move will even last through the summer? These are all wildcards when a stock has the price trend and operating history of SMCI.

SMCI weekly chart. Source: Barchart.

Fortunately, this is not a boiler room stock. It simply has a skittish history the past few years, which might make investors think thrice before approaching it. More on that later.

Fundamentally, SMCI is selling at only 19x forward earnings, 1.5x trailing sales, and revenue has grown at 33% a year the past 5 years. With BDO Global now firmly installed as the company’s new auditor, this could be a mover again. A reasonable debt ratio only aids that view.

SMCI key stats. Source: Ycharts.

SMCI: an offer we can’t refuse?

My concluding take on SMCI is this. The stock is like a wild child that is growing up and has survived a lot of foolish behavior during their youth. That’s all behind it, even if new problems emerge. In such a competitive industry like this one, a lot can go wrong.

But the stock is now priced that way. Statistically inexpensive for a tech stock, a stunning chart pattern (at least as of this writing) and one interesting intangible, that is both a feature and a bug of today’s market climate. In the same way that lesser-quality stocks like Gamestop (GME) and AMC Entertainment (AMC) had a huge set of willing buyers, even after breaking a lot of wallets, SMCI might just attract fever-buying again. And in this case, there’s a lot more behind it.

SMCI 6 month rolling returns. Source: Ycharts.

Today’s market is one part logic, many parts momentum. Charts like this one show that to me. SMCI is on its best 6-month run in a long time. And by taking a small position or using an option collar strategy to control risk, there could be a nice comeback story here.