Results from Taiwan Semiconductor (NYSE: TSM) set the semiconductor market up to fall, and all it took was a slim bit of news from Super Micro Computer (NASDAQ: SMCI) to spark the sell-off. Taiwan Semiconductor set it up by reducing its outlook for semiconductor growth this year, a fact that plays into the market valuation, which was high and driven by AI hype as much as reality. TSM still forecasts 10% industry-wide growth led by AI.
Super Micro Computer sparked an industry-wide sell-off when it delayed its earnings report. That’s it; Super Micro delayed the report, which could have been for many reasons. The market chose to focus on the worst, resulting in a 25% correction in the stock price and an opportunity for us today.
Expectations For Super Micro are High
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The market is jittery because of the expectations built into Super Micro Computer’s results. Among the many drivers of the outlook is the business at NVIDIA (NASDAQ: NVDA). Super Micro Computers is a significant user of NVIDIA and other GPUs and should see the same, if not a larger boost in its business. NVIDIA is expected to post revenue growth of 4X in its next report. That led analysts to raise their estimates for revenue and earnings for Super Micro many times in the last twelve months, setting the bar exceptionally high.
Pushing off the release touched a sensitive spot for the market, suggesting weak results or insufficient guidance to sustain high stock prices. Super Micro tends to prerelease, so there is a precedent even if the assumption is wrong. As it is, the analysts expect revenue to grow at least 200% compared to last year and for the margin to widen. Earnings are expected to grow more than 250%.
There are also technical factors in play that aid the volatility. Analysts' sentiment improved along with the outlook for results, leading them to raise their price targets for the stock. The increase in the consensus price target is monumental and suggests a bubble may have formed.
The analysts' consensus target tracked by Marketbeat.com rose 950% from $90 to $950 in twelve months due to the rise of AI, the potential for sales today, and the long-term gains in productivity it is supposed to bring. A little 25% give back is nothing compared to the big picture - AI is still in the early phases and will sustain a high business level for this company long into the future.
Until then, the consensus target is above the current price action and offers a 35% upside. Also noteworthy is that the analysts’ high price target was set days before the announcement. It is $1500 and indicates more than 100% of upside. If the FQ3 results are solid and have a good guide, this stock could rocket back to consensus and higher as quickly as it fell. Analysts are forecasting for results to accelerate through year-end but for growth to slow next year. Still, next year's 50% growth forecast is enough to put the valuation at a very reasonable 23X, with shares trading at a two-month low.
Insiders Sell, Institutions Buy Super Micro Computers
Insider selling, including larger shareholders, maybe a headwind for the market because they have been selling. The insiders own about 17% of the stock and have sold $70 million in shares over the last twelve months. Their activity increased quarterly in 2023, peaking in Q1 2024 as the stock price hit its all-time highs. Selling ended in February but could resume anytime, and a rebounding price point could be the trigger. Offsetting insider activity is the institutions. They may also trigger a rebound because they own about 85% of the comedy and have been buying on balance since Q4 last year.
Super Micro Computers corrected significantly, but the bulk of the sell-off may already be over. The market moved down to a previous support level, where support is still evident. Indicators also reveal oversold conditions and divergence that point to bottoming and potential for rebound. Assuming the market does not fall below $620, it should move sideways at current levels with a chance of trending higher later this year or next. If the market falls below $620, it could sink back below $100 from where it came. That is not expected.
