Written by 11:34 am AI, Stock

### The Dangers of Blindly Chasing the Popular AI Investment Trend

Super Micro Computer’s growth in the AI server market is well known, but this means it has al…

When the advantages of a property seem “apparent,” it is advisable to exercise caution. Despite the tempting prospect of foreseeing additional potential in Super Micro Computer (NASDAQ: SMCI) stocks after its impressive surge, if short-term traders have already factored in the best-case scenario for Super Micro Computer, they may have already taken advantage of the opportunity, indicating a wise moment to secure profits.

Some value-oriented investors point to Nvidia (NASDAQ: NVDA) stock’s rise as a sign that the artificial intelligence market might be overly valued. Nevertheless, there are indications suggesting that Super Micro Computer may actually be undervalued compared to Nvidia. This doesn’t necessarily advocate for short-selling Super Micro Computer stock, but it does imply that taking some profits could be a prudent decision.

A Noteworthy Achievement for SMCI Stock

Super Micro Computer seems to have achieved a significant milestone. On March 18, the company was officially added to the prestigious S&P 500 large-cap stock index.

This milestone signifies more than just prestige. Inclusion in the S&P 500 implies that a significant number of index fund investors could indirectly possess SMCI shares. Consequently, some may view the S&P 500 membership as a potential support level for the Super Micro Computer stock price.

How did Super Micro Computer evolve from a relatively unknown server designer to a key player? Undoubtedly, the recent surge in interest in AI has played a crucial role in Super Micro Computer’s ascent.

Similar to the strong demand for Nvidia’s AI-capable graphics processing units, there is also a rising need for Super Micro Computer’s AI-integrated servers.

Super Micro Computer displays agility in producing and delivering these servers. According to Rosenblatt Securities analyst Hans Mosesmann, “Super Micro has established a rapid-to-market model.”

Valuation Challenges for Super Micro Computer

However, a challenge arises. The highly efficient market is already cognizant of Super Micro Computer’s quick market entry capability.

In line with Wells Fargo analyst Aaron Rakers’ cautious assessment, Super Micro Computer’s stock is poised to be particularly sensitive to any indications of a slowdown in GPU-based server demand.

Essentially, Super Micro Computer now confronts the demanding task of meeting the market’s high expectations regarding server demand. If you had reservations about Nvidia’s valuation, the lofty valuation of Super Micro Computer in 2024 might be surprising.

A commonly cited metric can be utilized to compare the two companies. Presently, Nvidia boasts a GAAP trailing 12-month price-to-earnings ratio of 73.63x. In contrast, the sector median P/E ratio stands at 29.55x.

On the other hand, Super Micro Computer’s P/E ratio is 83.35x. This contrast highlights Rakers’ observation that SMCI stock is already pricing in significant upside potential.

Many traders may not be aware of Super Micro Computer’s higher valuation relative to Nvidia. They may not realize that Super Micro Computer’s market capitalization was only around $5 billion before November 2022 when OpenAI introduced ChatGPT.

Today, Super Micro Computer commands a market cap of approximately $60 billion. Sustaining this growth trajectory going forward will present a significant challenge for Super Micro Computer.

SMCI Stock: Avoid the ‘Obvious’ Trade

While it may be clear that Super Micro Computer can swiftly produce and market its AI-enabled servers, the market has already factored in the company’s strengths and growth prospects.

Investing in Super Micro Computer has become such an “obvious” choice that numerous short-term traders have already taken advantage of it. A comparison of Super Micro Computer’s valuation and market capitalization with those of Nvidia underscores this point.

Therefore, the prudent course of action at this point is to secure profits on SMCI stock if you currently hold it. For potential buyers, it might be wise to wait for a share price retracement of at least 25%.

As of the publication date, David Moadel did not hold any positions (directly or indirectly) in the securities mentioned in this article. The views expressed in this article are solely those of the author and are subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – occasionally pushing boundaries – for Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. Additionally, he serves as the principal analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel, Looking at the Markets.

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Tags: , Last modified: March 25, 2024
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