Super Micro Computer Inc (SMCI, Financial), a leading provider of high-performance server technology services, has recently shown a daily gain of 3.65%, and a 3-month gain of 13.79%. With an Earnings Per Share (EPS) (EPS) of 11.45, the question arises - is the stock significantly overvalued? This article aims to provide an in-depth analysis of Super Micro Computer's valuation, based on its current market performance and intrinsic value. Let's delve into the details.
Company Overview
Super Micro Computer Inc operates in the high-performance computing, cloud computing, data center, Big Data, and "Internet of Things" embedded markets. The company's solutions range from server, storage, blade, and workstations to full racks, networking devices, and server management software. With a modular architectural approach, Super Micro Computer offers flexibility in delivering customized solutions. The company generates more than half of its revenue in the United States, with the rest coming from Europe, Asia, and other regions.
Currently, Super Micro Computer's stock is trading at $284.23 per share, with a market cap of $15 billion. However, according to the GF Value, an estimation of the stock's fair value, it should be priced at $78.05. This discrepancy suggests that the stock may be significantly overvalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is computed based on historical trading multiples, an adjustment factor from GuruFocus based on the company's past returns and growth, and future estimates of business performance. The GF Value Line, displayed on our summary page, provides an overview of the fair value that the stock should ideally be traded at.
According to the GF Value, Super Micro Computer's stock is significantly overvalued. This conclusion is based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If a stock's price is significantly above the GF Value Line, it is likely overvalued and may offer poor future returns. Conversely, if a stock's price is significantly below the GF Value Line, it is potentially undervalued and may provide higher future returns.
Given that Super Micro Computer is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength
Before investing in a company's stock, it's crucial to assess its financial strength. Companies with weak financial strength pose a higher risk of permanent loss. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Super Micro Computer has a cash-to-debt ratio of 1.52, ranking better than 52.58% of companies in the Hardware industry. Overall, Super Micro Computer's financial strength is rated 9 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. High-profit margin companies are generally safer investments than those with low-profit margins. Super Micro Computer has been profitable for 10 out of the past 10 years. Over the past twelve months, the company generated a revenue of $7.10 billion and an Earnings Per Share (EPS) of $11.45. Its operating margin of 10.68% ranks better than 77.73% of companies in the Hardware industry. Overall, Super Micro Computer's profitability is ranked 9 out of 10, indicating strong profitability.
Growth is an essential factor in a company's valuation. Research by GuruFocus has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Super Micro Computer's 3-year average revenue growth rate is better than 90.67% of companies in the Hardware industry. Its 3-year average EBITDA growth rate is 86.9%, ranking better than 96.73% of companies in the Hardware industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Super Micro Computer's ROIC was 31.4, while its WACC came in at 11.84.
Conclusion
In summary, the stock of Super Micro Computer (SMCI, Financial) is believed to be significantly overvalued. The company's financial condition is strong, and its profitability is high. Its growth ranks better than 96.73% of companies in the Hardware industry. To learn more about Super Micro Computer stock, you can check out its 30-Year Financials here.
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