In this article, I evaluate two data center stocks: Super Micro Computer (SMCI) and IBM (IBM). A closer analysis leads me to set a bearish view for Super Micro Computer and a neutral view for IBM.
Super Micro Computer (Super Micro) makes servers for cloud computing, data centers, big data, artificial intelligence, 5G, and the Internet of Things. It also offers other computing products, including low-power computing technology. IBM, meanwhile, is of course a traditional computing giant that now offers servers for data centers and a wide range of enterprise software, networking equipment, and other computing needs.
Super Micro shares are still up 55% year-to-date after plunging 52% over the past three months. The stock is also up 78% over the past year. Elsewhere, IBM shares have soared 25% over the past three months, bringing their year-to-date return to 35%. Big Blue shares are up 53% over the past year.
(SMCI = green line, IBM = black line)
Despite the different quarterly results, the respective valuations of Supermicro and IBM are not that different. We compare their price-to-earnings (P/E) ratios to assess their valuations relative to each other and to their sector.
For comparison, the information technology industry is trading at a P/E of 44.5x, versus its three-year average of 67.9x.
Supermicrocomputer
With a price/earnings ratio of 21.8x, Super Micro Computer is trading at a considerable discount to its industry. However, such a discount seems justified given recent developments at the company. A bearish view seems appropriate, at least until things calm down and we receive some transparency on the situation.
A negative report on SMCI from short-seller Hindenburg Research raised all sorts of red flags. The firm makes a variety of accusations against the company, including that it manipulated its finances. Hindenburg alleged accounting issues along with undisclosed transactions between related parties, sanctions violations, and issues with export control. Short-sellers profit when a stock price plummets, so they may be motivated to issue reports on companies they are shorting for that reason. On the other hand, however, Hindenburg Research has a pretty good track record and was right about the fraud at Nikola (NKLA) in 2020.
Additionally, Super Micro has already had documented accounting violations in the past, having settled a previous case with the Securities and Exchange Commission in 2020 for $17.5 million. As a result, investors might want to stay away from SMCI until more transparency is available, especially after the company decided to delay the release of its annual report.
What is the target price for SMCI shares?
Super Micro Computer has a consensus rating of Hold based on a Buy rating, 10 Hold ratings, and a Sell rating assigned over the past three months. At $615.18, the average target price for Super Micro Computer stock implies an upside potential of 38.44%.
With a P/E of 23.7x, IBM also trades at a very discounted valuation compared to its sector and also offers an attractive dividend yield. However, a review of the company’s valuation history reveals that the stock is trading at the top of its typical range dating back to October 2019. Therefore, a neutral view seems appropriate, as does following a buying opportunity on dips.
Right now, I’m cautious on IBM because of its valuation, although there are a lot of positives in this stock. Of course, IBM has been around for a long time and isn’t going away anytime soon. It’s a solid, growing tech company, although it’s not posting the level of revenue growth needed to be considered a growth stock. Since October 2019, the company’s typical P/E range has been between about 17.5x and 25.1x. Therefore, the stock looks a bit pricey compared to its historical range, suggesting that a dip-buying opportunity could emerge before long.
However, investors looking for technology exposure in their dividend portfolio may not find a better stock, as IBM’s dividend yield sits at around 3.1% with a healthy payout ratio of 65.4%, suggesting that the dividend is attractive and fairly safe. Moreover, IBM has a 29-year track record of increasing its dividend annually, which further sweetens the deal.
Finally, IBM’s long-term stock price appreciation shows that the stock looks like a buy-and-hold investment in a dividend portfolio. Shares are up 92% over the past three years, 101% over the past five, and 80.6% over the past 10. IBM has recently entered overbought territory with a Relative Strength Indicator of 73.8. Anything above 70 suggests that a stock is overbought and a downward correction could be near. I would simply wait for IBM stock to fall to the lower end of its typical P/E range before potentially buying the stock.
What is the target price for IBM stock?
IBM has a consensus rating of Hold based on five Buy, six Hold, and two Sell ratings assigned over the past three months. At $197.46, the average price target on IBM stock implies a downside potential of 8.69%.
Conclusion: Weigher on SMCI, neutral on IBM
On the one hand, Super Micro could represent a buying opportunity at the current time due to the short seller’s report. However, there is usually fire where there is smoke, and the short seller targeting the company has a good track record so far. The delayed annual report also reinforces the major lack of transparency and may represent a serious breach of shareholder trust, so investors might want to stay away from Super Micro Computer at this time.
On the other hand, IBM has a lot of positives, even though its stock price is relatively high. Even if someone were to buy shares at the current price, the dividend and long-term appreciation potential make this a stock worth buying and holding for the long term. However, I think IBM could suffer a pullback before long, so I think it’s best to wait before pulling the trigger.
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