Why Investing in These Tech Stocks May Pay Off
Investing in Volatile Markets
The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. This perspective highlights the opportunities that can arise when stocks experience substantial short-term valuation pullbacks.
Even as the broader market marches higher, there remains ample opportunity for investors to capitalize on undervalued stocks. This article discusses two companies where buying shares while they are down can potentially lead to market-crushing returns.
This AI Stock Trades at a Surprisingly Low Earnings Multiple
Keith Noonan: Super Micro Computer (NASDAQ: SMCI) specializes in building high-performance servers utilized in data centers. By harnessing Nvidia's market-leading graphics processing units (GPUs) as key components, Supermicro delivers powerful computing machines capable of running advanced artificial intelligence (AI) applications.
With demand for AI processing surging, Supermicro has experienced an explosion in sales and earnings. The company’s revenue soared by 110%, reaching $14.9 billion in its last fiscal year. Additionally, non-GAAP (adjusted) earnings per share increased by 87%, hitting $22.09.
The outlook for continued growth appears strong. For the current fiscal year, Supermicro projects sales to range between $26 billion and $30 billion. Hitting the midpoint of this guidance indicates an impressive annual sales growth of 87%.
Despite this remarkable growth trajectory, Supermicro is valued at only 18 times its expected earnings for the year following recent volatility. Furthermore, the stock remains down 48% from its high reached earlier this year. The question arises, why is it trading at such a steep discount?
A contributing factor to this discount is the company's margin performance. Supermicro's gross margin fell to 11.2% last quarter, down from 15.5% and 17% in prior periods. Investors are also increasingly concerned about the cyclicality of demand for AI processing hardware.
If demand for high-end rack servers surges again next fiscal year, the current stock price could prove significantly undervalued. While some investors foresee demand leveling off, they may underestimate the demand for AI-tailored servers.
With many established tech giants ramping up their processing capabilities, there is considerable potential for medium-sized players like Supermicro to grow. Expect the demand from government customers to increase significantly in the coming five years. While managing demand cycles for AI hardware involves speculation, Supermicro appears to be a high-risk, high-reward stock worth considering based on its growth rates.
ON Semiconductor's Strategic Positioning
Lee Samaha: ON Semiconductor (NASDAQ: ON) is strategically positioning itself in key markets such as electric vehicles (EVs), energy infrastructure, advanced driver assistance systems (ADAS), EV charging, industrial automation, and 5G cloud technologies.
However, many of these markets face challenges in the near term. High interest rates are hindering auto sales, including investments in EVs and ADAS, while the industrial automation sector experiences slow order growth due to economic conditions.
CEO Hassane El-Khoury’s cautious outlook reflects this reality, as he discusses a potential 'L-shaped' recovery rather than a swift rebound. The timeline for recovery in automotive sales and industrial investments may lag as consumers and businesses wait for reduced interest rates.
Despite current market challenges, ON Semiconductor is positioned well for future growth. The company’s management recently committed up to $2 billion to a new manufacturing facility, supporting expansion efforts, including a deal to supply silicon carbide chips to automotive giant Volkswagen.
The stock is down about 30% from its recent peak, trading at just under 19 times expected earnings for 2024, which enhances its appeal as a value investment, regardless of the shape of the recovery.
Should You Invest $1,000 in Super Micro Computer Right Now?
Before considering investment in Super Micro Computer, it is vital to evaluate its market position thoroughly. Currently, investors are seeking effective strategies and recommendations for stock picks.
Investment advice is highlighted particularly when examining potential stocks for the future. Super Micro Computer is among several companies offering unique growth potential, despite being notably excluded from some top recommendations.
Ultimately, the evaluation of this investment should involve a mix of market assessment, company performance analysis, and broader economic indicators affecting the industry.
Frequently Asked Questions
What is Super Micro Computer known for?
Super Micro Computer is renowned for building high-performance servers used in data centers, pivotal for AI applications.
How has ON Semiconductor positioned itself in the market?
ON Semiconductor is focusing on key growth markets such as electric vehicles, energy infrastructure, and industrial automation to fuel long-term growth.
What recent financial performance has Super Micro Computer exhibited?
The company reported a significant revenue increase of 110%, reaching $14.9 billion in its last fiscal year.
Why are investors concerned about Super Micro Computer?
Investors are concerned due to decreasing gross margins and the cyclicality of demand for AI processing hardware.
What is the outlook for ON Semiconductor's stock?
ON Semiconductor’s stock is expected to provide good value, trading at around 19 times its expected earnings for 2024, making it appealing for long-term investors.
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