Supermicro almost doubled in value in 2022 as tech stocks plunge

It’s been a brutal year for tech stocks. The Nasdaq is headed for its worst slump since 2008 and is poised to underperform the S&P 500 for a second straight year. Among mega-cap tech stocks, Amazon, Meta and Tesla have each lost at least half their value.

Investors looking for some sign of optimism can turn to a 29-year-old server maker located in the heart of Silicon Valley. Shares of Super Micro Computer have soared 89% in 2022, topping all other U.S. tech companies valued at $1 billion or more. Supermicro has a market cap of $4.4 billion, up from $2.4 billion at the start of the year.

Supermicro manufactures computers and sells them to companies, which use them as servers for websites, data storage and applications like artificial intelligence algorithms. In the low-margin server business, Supermicro competes with Dell, IBM and Hewlett Packard Enterprise as well as lesser-known players such as China’s Inspur. According to estimates from The Next Platform, Supermicro had about 2.6% of the market in 2021.

Supermicro has sought to differentiate itself in the market by allowing customers to more easily customize their computers. That makes for a more profitable offering than off-the-shelf servers.

The strategy has been working. Supermicro reported 46% growth in its fiscal 2022, which ended in June, to $5.2 billion in revenue. Earnings per share climbed to $5.32 in 2022 from $2.09 in 2021 and $1.60 the year before that.

“The stock is actually just simply mirroring the EPS increases we have seen over two years,” said Nehal Chokshi, an analyst at Northland Capital Markets who recommends buying the stock. Chokshi has a price target of $165, by far the highest among five analysts tracked by FactSet.

Supermicro closed on Tuesday at $82.89.

Chokshi said that Supermicro’s profitability and growth have been strong enough that it might deserve a larger multiple. Yet even with this year’s rally, the stock is only trading at 8.6 times earnings over the next 12 months, which is lower than its five-year average of 9.5, according to FactSet. For the past 12 months, it trades at 10.1 times earnings, down from a five-year average of 17.8.

“There still hasn’t been multiple expansion,” Chokshi said. “A lot of investors, including myself, find that befuddling, because this is a name that has historically generated 20-plus percent revenue and EPS growth that’s trading only at 10 [times] earnings.”

Across the board, investors have…