Embracing Volatility in Investing
True investors see volatility as an opportunity. A market that swings wildly often presents irrationally low prices for solid companies. This viewpoint underscores the potential benefits that can arise when stocks experience significant short-term drops in value.
Even as the overall market trends upward, there are still plenty of chances for investors to take advantage of undervalued stocks. This article explores two companies where purchasing shares during downturns could lead to impressive returns that outperform the market.
An AI Stock with a Surprisingly Low Earnings Multiple
Keith Noonan: Super Micro Computer (NASDAQ: SMCI) specializes in creating high-performance servers used in data centers. By leveraging Nvidia's leading graphics processing units (GPUs), Supermicro produces powerful computing systems capable of handling sophisticated artificial intelligence (AI) applications.
With the demand for AI processing skyrocketing, Supermicro has seen a remarkable surge in both sales and earnings. The company’s revenue surged by 110%, reaching an impressive $14.9 billion in its most recent fiscal year. Additionally, its non-GAAP (adjusted) earnings per share rose by 87%, reaching $22.09.
The prospects for ongoing growth look promising. For the current fiscal year, Supermicro anticipates sales between $26 billion and $30 billion. Achieving the midpoint of this guidance would represent an impressive annual sales growth of 87%.
Despite this exceptional growth path, Supermicro is currently valued at only 18 times its expected earnings for the upcoming year, following recent market fluctuations. Moreover, the stock is down 48% from its peak earlier this year. This raises the question: why is it trading at such a significant discount?
One reason for this discount is the company's margin performance. Supermicro's gross margin dropped to 11.2% last quarter, down from 15.5% and 17% in previous quarters. Investors are also increasingly worried about the cyclical nature of demand for AI processing hardware.
If demand for high-end rack servers rebounds in the next fiscal year, the current stock price could be seen as significantly undervalued. While some investors predict demand will stabilize, they may be underestimating the need for servers specifically designed for AI applications.
With numerous established tech giants enhancing their processing capabilities, there is substantial potential for medium-sized companies like Supermicro to expand. Anticipate a notable increase in demand from government clients over the next five years. Although managing demand cycles for AI hardware involves some speculation, Supermicro stands out as a high-risk, high-reward investment worth considering given its growth rates.
ON Semiconductor's Strategic Positioning
Lee Samaha: ON Semiconductor (NASDAQ: ON) is strategically positioning itself in critical markets, including electric vehicles (EVs), energy infrastructure, advanced driver assistance systems (ADAS), EV charging, industrial automation, and 5G cloud technologies.
However, many of these sectors are currently facing challenges. Elevated interest rates are impacting auto sales, including investments in EVs and ADAS, while the industrial automation sector is experiencing sluggish order growth due to economic conditions.
CEO Hassane El-Khoury’s cautious outlook reflects this situation, suggesting a potential 'L-shaped' recovery instead of a quick rebound. The timeline for recovery in automotive sales and industrial investments may be prolonged as consumers and businesses await lower interest rates.
Despite the current market hurdles, ON Semiconductor is well-positioned for future growth. The company’s management has recently committed up to $2 billion for a new manufacturing facility, supporting expansion efforts, including a deal to supply silicon carbide chips to automotive leader Volkswagen.
The stock has declined about 30% from its recent peak, trading at just under 19 times its expected earnings for 2024, enhancing its attractiveness as a value investment, regardless of the recovery's shape.
Is Now the Right Time to Invest $1,000 in Super Micro Computer?
Before deciding to invest in Super Micro Computer, it’s essential to thoroughly assess its market position. Currently, investors are on the lookout for effective strategies and stock recommendations.
Investment guidance is particularly important when considering potential stocks for the future. Super Micro Computer is one of several companies that offer unique growth opportunities, even though it may be overlooked in some top recommendations.
Ultimately, evaluating this investment should involve a combination of market analysis, company performance assessment, and consideration of broader economic indicators that impact the industry.
Frequently Asked Questions
What is Super Micro Computer known for?
Super Micro Computer is well-known for manufacturing high-performance servers that are essential for data centers, particularly for AI applications.
How has ON Semiconductor positioned itself in the market?
ON Semiconductor is focusing on key growth areas such as electric vehicles, energy infrastructure, and industrial automation to drive long-term growth.
What recent financial performance has Super Micro Computer exhibited?
The company reported a remarkable revenue increase of 110%, reaching $14.9 billion in its last fiscal year.
Why are investors concerned about Super Micro Computer?
Investors are worried due to declining gross margins and the cyclical nature of demand for AI processing hardware.
What is the outlook for ON Semiconductor's stock?
ON Semiconductor’s stock is anticipated to offer good value, trading at around 19 times its expected earnings for 2024, making it attractive for long-term investors.
