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Super Micro Computer (SMCI +22%) soars above all-time highs today following Friday's announcement it would join the S&P 500 on March 18, replacing Whirlpool (WHR), which will join the S&P MidCap 400. There seems to be no slowing of the high-performance server provider since it blew Q2 (Dec) forecasts out of the water in mid-January. The upbeat guidance triggered a rush of buying, sending the stock over +200% higher before enduring a 30% correction, only to resume its breathtaking rise following impressive quarterly results from NVIDIA (NVDA).

• What does SMCI do? Like big-tech names in the server industry, such as Dell (DELL), Hewlett Packard Enterprise (HPE), and Cisco (CSCO), SMCI designs and provides servers for enterprise data centers, AI, and edge computing. The difference between SMCI and more prominent names is that SMCI does not brand its servers. Instead, it is a white-box server provider, leaning on combining OEM and generic components to build customized servers, giving customers flexibility in how they want their servers designed.
• SMCI's competitive advantage lies in its fluidity when building servers. Outside of DELL, which just saw its shares explode following JanQ results last week, SMCI's main competitors have struggled to produce similar gains despite the surge in AI technology and the accompanying server demand. For example, SMCI's DecQ revs more than doubled yr/yr after delivering a mild 14% increase in SepQ while HPE's JanQ revenue fell for the first time in three years after a 5% jump in OctQ.
• Management commented in late January that the demand for AI inferencing systems is ushering in an accelerating demand phase. Supporting this demand has been an improving supply backdrop for GPU components, primarily those from NVDA. Founder and CEO Charles Liang remarked during SMCI's DecQ call that he felt very confident the current AI boom would persist for many quarters if not years.

Still, with such dependence on AI, SMCI's massive gains are at risk of a swift pullback on any demand slowdown. For example, if Broadcom's (AVGO) upcoming JanQ report this Thursday after the close does not underpin sustained AI demand or guidance just fails to meet expectations, SMCI could endure selling pressure. The stock is also prone to wild swings, falling 20% in one day last month. Competition also remains a threat, especially since most of SMCI's rivals have much longer operating histories and greater resources. DELL noted last week that it is seeing robust demand for its AI-optimized server portfolio, with orders surging by nearly 40% sequentially.

The AI craze has ignited a monumental rally in SMCI, shooting up 1,000% within the past year. SMCI has delivered substantial financial improvements over the past couple of quarters as it prepares to more than double the size of its current AI portfolio with many upcoming NVDA chips, which customers will require for continued AI innovation. Nevertheless, we urge caution trading at such lofty price levels.