This week, Fintel has begun providing coverage on Super Micro Computer (US:SMCI) following Tuesday’s third-quarter fiscal 2023 update.

SMCI’s share price has risen 136% over the last year and 530% on a five-year view. In this report, using data from the Fintel quantitative platform, we will reveal why the company continues to look attractive at current levels.

While the stock is trading at all-time highs, it continues to trade on an undemanding price-to-earnings ratio of 12.6x which leads us to believe there could be more upside to the story.

Super Micro Computer is a global provider of high-performance, high-efficiency server technology, headquartered in San Jose, California. The company designs and develops application-optimized server solutions based on modular and open-standard architecture.

Its customers include cloud service providers, enterprise data centers, and artificial intelligence (AI) and edge computing applications.

On Target

In Tuesday’s update, the company confirmed that it generated $1.28 billion in sales as per its preliminary update on April 24, down from $1.36 billion in the prior year.

One positive was that SMCI showed an increase in gross margins, and growth in underlying net income grew to $93.5 million in 2023 compared with $85.5 million in 2022. The underlying bottom-line result equated to $1.63 per share, which fell short of market expectations of a figure north of $1.70.

Fintel’s analysis of Management Effectiveness shows an improving trend in operating cash return on investor capital (OCROIC), which is a positive sign for investors. A Fintel proprietary metric, OCROIC measures how much cash a company generates from its invested capital.

The improvement in OCROIC indicates that the company is utilizing its resources more efficiently, which is a good sign for long-term investors. The OCROIC has risen to its best level in two years at 0.11 after being negative over most of 2022.

Furthermore, the $7 billion-plus market capitalization company has provided an upbeat forecast for Q4 and FY23, indicating a positive outlook for the company.

Optimistic Outlook

Looking ahead, the company has provided an optimistic outlook for Q4 and FY23. For Q4 FY23, the company expects net sales of $1.7 billion to $1.9 billion vs consensus of ~$1.65 billion, and non-GAAP net income per diluted share of $2.21 to $2.71 which was well above market forecasts of around $1.75 per share.

The strong fourth quarter guidance helped regain investor confidence lost after the preliminary update and resulted in the stock rising more than 28% on Wednesday.

For FY23, the company maintains its guidance for net sales from a range of $6.6 billion to $6.8 billion, and non-GAAP net income per diluted share from a range of $10.50 to $11.00. These projections indicate the company’s confidence in its ability to overcome the supply chain challenges and meet the market demand for its products.

The chart below shows SMCI improving cash generating abilities with the company generating record medium-term flows. At Fintel we view this as a positive indicator for a company as it is supportive of valuation and provides financial flexibility to pursue growth.

While Fintel’s Quality score of 39.46 is not high relative to other peer stocks, it is likely to improve over time as operating conditions continue to strengthen in the coming quarters.

Institutional Opinions

Fintel’s consensus target price of $107.30 suggests the market thinks the stock is full-valued and could give up 20% of gains this year.

Wedbush’s Matt Bryson came out on Wednesday with what he titled a “Super Outlook Following a Less Super Quarter.” The analyst has the stock rated as ‘underperform’ with a $65 per share 12-month price target. He wrote in a note to clients that the target reflects “a high single/low double digit multiple as appropriate for a server builder and in-line with SMCI’s historic multiple range as well as peer valuations.”

We think the average consensus target price is likely to drift higher given the wide dispersion and skew of recommendations towards ‘buy’ calls. Fintel’s dispersion of recorded ratings include two ‘strong buy’, six ‘buy’ and two ‘hold’.

Overall, we at Fintel believe that Super Micro Computer is well-positioned to capitalize on the growing demand for AI and edge computing applications, and is a promising investment opportunity for long-term investors.

This article originally appeared on Fintel

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