(Bloomberg) — Supermicrocomputers' long rally ended Friday with a chilling jump, a drop that threatened to derail what was supposed to be the best week ever for server makers.
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Stocks initially rose, but then began to fall, dropping as much as 20%, the biggest intraday decline since August. The company's stock was up more than 35% this week before Friday's drop, and remains on track for double-digit gains this week. If the stock closes lower, it will be affected by a nine-session rally streak, the longest since 2016.
Despite Friday's decline, the recent rally shows how Super Micro has become one of the most popular names in the field of artificial intelligence. The stock has risen 18 of the last 20 times through Thursday and has more than tripled so far this year. This follows a 246% increase compared to 2023.
“When things get this bad, it's not the financial institutions that want to hold something as a long-term investment, it's the people who are taking a shot at the momentum,” said Michael Matousek, head trader at US Global Investors. It's the psychology of casinos.'' “I'm sure some people have been run over trying to short this, and some have had success, but it really comes down to luck if you catch something like this.”
Led by newly created positions in puts expiring on Friday, total options volume increased by more than double the average over the past month. The most active contract protects against his 4% decline until the end of the session. Investors drove up the price of puts throughout the day, signaling an increased demand for downside protection as stocks tumbled.
The rally quadrupled CEO Charles Liang's wealth this year to $7.8 billion, the biggest rise in the Bloomberg Billionaires Index of the world's 500 richest people.
“We provide the world's best generative AI platform,” Liang said in an interview on Bloomberg TV on Friday, when asked if the company was being valued fairly. He added that with enough semiconductors, the company's revenue could reach $25 billion. “There is a shortage of chips. If we get more supply from chip companies and Nvidia, we will be able to ship to more customers,” Liang said.
The company is expected to generate $7.1 billion in revenue in fiscal 2023 and $14.5 billion in revenue this fiscal year, according to data compiled by Bloomberg.
The San Jose, California-based company has become popular with investors seeking exposure to artificial intelligence and the infrastructure such as chips and servers that run AI applications. Bank of America started reporting on the stock earlier this week with a “buy” rating and the highest price target on the market, but the AI server market is expected to grow at an average annual growth rate of 50% over the next three years. I predict that will happen. The company said it expects Supermicro to be the main winner of that growth.
Growth expectations are so solid that Supermicro doesn't trade at the nosebleed valuations of other investor favorites. The stock trades at 39 times forward earnings, while Arm Holdings, a chip design company that recently issued bullish sales forecasts in part due to AI spending, trades at more than 90 times forward earnings. Perhaps the most prominent beneficiary of his interest in AI, his Nvidia Corp. has a multiple of about 34.
The preliminary quarterly results announced last month were significantly higher than expected, and the company subsequently raised its sales forecast.
Wall Street took notice. Analyst consensus for Supermicro's 2025 net income has increased by 52% in the last month, while revenue expectations have increased by a similar amount, according to data compiled by Bloomberg.
Some analysts have warned about the magnitude of the stock price movement. Wells Fargo Securities initiated coverage on Friday with an equal weight rating, saying the stock is “already discounting solid upside.” Still, analyst Aaron Lakers said the company's “fundamental AI-powered momentum, supported by engineering-first differentiation, is surprising and supports some sustainable valuation reassessment.” It should be,'' he said.
The gains at one point boosted Supermicro's valuation to more than $56 billion, making it larger than long-time semiconductor powerhouses such as Microchip Technology. The company's weight in the Russell 2000 Index is 1.8%, making it the largest single stock in the index. According to Bloomberg Intelligence, the phenomenon dates back to 1999.
–With assistance from Kristine Owram, Carly Wanna, and Brody Ford.
(Updates with transaction and CEO comment.)
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