It’s been said that the NASDAQ (NDX) tends to steer the broader stock market, and while this may increasingly be true, it really works each ways. High-flying tech stocks will be probably the most vulnerable to steep drawdowns, and today’s rout in Super Micro Computer (NASDAQ:SMCI) stock should function a reminder to overeager shiny-object buyers.
What’s the reminder? It’s that hype and hope can reign supreme within the short term, but valuations will matter in the end. There’s also a lesson here that trees don’t grow straight to the heavens, because the old saying goes.
Super Micro Computer’s tree grew fast, but today it’s getting chopped down by the market’s lumberjacks. Because the weighing machine becomes a threshing machine, highflyers turn into fast crashers and the elevator ride down could actually be faster than SMCI stock’s malfunctioning escalator ride up.
When trying to find the “next” NVIDIA goes mistaken
For ultra-nimble and intensely lucky stock traders, trying to find the “next” NVIDIA (NASDAQ:NVDA) might need gone pretty much for some time. This 12 months, Super Micro Computer stock catapulted from $300 to a mid-March peak of around $1,200.
Escalator rides will be fun, little question. As SMCI stock ascended with none resistance by any means, the “next” NVIDIA thesis looked as if it would play out perfectly. In any case, artificial intelligence (AI) continues to be top-of-mind on Wall Street in 2024 and Super Micro Computer makes a speciality of AI-enabled servers.
The subsequent thing you understand, Super Micro Computer was added to the S&P 500 and a few Wall Street experts were quick to praise the much-touted up-and-comer. Rosenblatt Securities analyst Hans Mosesmann, for example, highlighted Super Micro Computer as having “developed a model that’s quick to market.”
More analysts jumped on the bandwagon, with JPMorgan Chase publishing a $1,150 price goal on SMCI stock and Northland analyst Nehal Chokshi one-upping JPMorgan with a $1,300 goal. Meanwhile, Super Micro Computer did its part to fire up hype by raising its fiscal 2024 revenue guidance from an already ambitious range of $10 billion to $11 billion, to a substantially higher range of $14.3 billion to $14.7 billion.
Not that each voice on Wall Street was super bullish about Super Micro Computer, mind you. Daring to go against the grain, Aaron Rakers of Wells Fargo (NYSE:WFC) opined that Super Micro Computer stock “might be highly susceptible to any indications of tempering GPU-based server demand.”
In fact, cautionary voices are largely disregarded when bubbles expand. Thus, with Super Micro Computer’s third-quarter fiscal 2024 financial results on tap this month – and the corporate’s pre-earnings results release expected to occur today or thereabouts – SMCI continued to trade at elevated levels, until it didn’t.
The signs were there
In any bubble, there are at all times at the very least a couple of signs that the proverbial emperor is wearing no clothes. The issue is that, for hasty traders, the signs are only obvious in hindsight.
For one thing, for those who thought NVIDIA’s valuation was excessive, you’ll surely be surprised to find that Super Micro Computer might actually be much more overvalued. NVIDIA’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio of 70.97 is, I’ll acknowledge, quite high. Just to offer some perspective, the sector median trailing P/E ratio is 27.1.
Nevertheless, Super Micro Computer’s trailing P/E ratio of 72.4 is even higher than NVIDIA’s multiple. It’s also price noting that Super Micro Computer’s five-year average P/E ratio is nineteen.64, indicating that the market hasn’t at all times been over-hyped about Super Micro Computer and other firms with AI-tech connections.
One other red flag, for individuals who were willing to see red flags within a growing bubble, was when Super Micro Computer announced that it will “offer” (i.e., print up and sell) 2 million common-stock shares at $875 apiece. On the time of that disclosure – and despite the share-value-debasement concerns that investors must have considered – SMCI stock was within the means of ballooning from $900 to $1,200 in a matter of days.
And eventually, here we’re, and Super Micro Computer stock is tumbling 18% today. As a substitute of pre-releasing the corporate’s Q3-FY2024 results today as investors had anticipated, Super Micro Computer offered no pre-release by any means, as a substitute simply announcing the timing of the regular earnings release date as April 30.
Wells Fargo analysts summed up the market’s disappointment, writing that Super Micro failed to offer a “positive preannouncement, which is being considered a negative.” I’d say that’s an understatement and would propose that the well-deserved reckoning for SMCI stock is, to the chagrin of bubble blowers in every single place, now underway.