2024-03-18 06:30:00
Nvidia has been an undisputed darling among investors amid the artificial intelligence (AI) craze, with its shares more than quadrupling in the past year. But the stock price of one of the chipmaker’s clients has performed even better.
Once unknown, server maker Super Micro Computer has become a go-to supplier for companies and governments eager to participate in the AI boom. The company’s sales of servers equipped with Nvidia’s AI chips have surged, and the company’s revenue is expected to double this year and surpass some of the industry’s largest competitors.
Super Micro Computer, whose shares have risen more than 11 times in the past 12 months, will be included in the U.S. large-cap index S&P 500 on Monday. At that point, the stock will be the index’s best-performing stock in a year, by a wide margin.
People often refer to the company by its brand name, Supermicro. Supermicro was founded in Silicon Valley in 1993, the same year Jensen Huang co-founded Nvidia. Like Nvidia, Supermicro has been led by one person from its inception until now, President and CEO Charles Liang, who was born in Taiwan and came to the United States after graduating from college.
Liang said in an interview with The Wall Street Journal after the meeting that he and Huang had known each other for decades. But until now, the fates of the two companies have been closely linked in this AI boom.
For its first two decades or so, Nvidia focused primarily on making chips that improved computer graphics for gamers. Supermicro is seizing the development opportunities of cloud computing and the digital economy to compete in the less popular field of data center servers.
Then, AI came along. Nvidia’s chips have become the main force in this craze. These chips can perform very complex calculations, and the existence of systems such as OpenAI’s ChatGPT depends on such calculations. Server makers that can deliver these chips to customers in the fastest and largest quantities have an advantage.
After meeting, Liang said it was helpful that his base in San Jose, California, is only a 15-minute drive from Nvidia’s headquarters in Santa Clara. “Our engineering team was able to work together from early morning until midnight,” he said.
Industry executives and analysts say Supermicro’s recent dominance of the AI boom is also partly due to its strategy of making electronic “building blocks” that can be assembled into nearly endless server configurations. The company’s competitors offer customers more limited products.
Analysts say this flexibility is an advantage amid the AI boom. Developers of self-driving car technology require different server configurations than companies making language-generative AI systems such as ChatGPT. Supermicro can provide customized infrastructure for both.
Rosenblatt Securities analyst Hans Mosesmann said competitors are trying to catch up with Supermicro in building custom servers.
Mosesmann said Supermicro’s pace is too fast to keep up.
“Give me more chips”
Liang Jianhou said Supermicro also benefits from having more than $1 billion in inventory. Supermicro will be able to deploy such chips in large quantities even when demand surges resulting in prolonged shortages of Nvidia’s most advanced chips.
Last summer, while attending a computing conference in Taiwan with Jen-Hsun Huang, Liang previewed an AI server that he said at the time would be available in the coming weeks, depending on the supply of Nvidia chips. Condition. “It’s up to you, not me,” Huang said.
After seeing this, Liang replied: “Give me more chips!”
Supermicro was growing so fast that it needed to raise capital to buy the chips, which cost about $25,000 each. Last month, the company raised $1.5 billion through the sale of convertible bonds, three months after raising $600 million through a stock offering.
“We need more funds because the demand is so strong,” Liang said later. He also said the cash would also help build Supermicro’s supply chain.
As part of that effort, Liang is expanding production in San Jose as well as Taiwan and Malaysia. Liang said after meeting that his goal is to produce 5,000 rack servers per month by the middle of this year. The servers are stacked 6 feet high and nearly 2 miles long.
More than 50% of them are AI, he said. Liang Jianhou also said that the growth in manufacturing is enough to bring the company’s potential annual revenue to more than $25 billion; based on the company’s latest quarterly earnings, this means that its annual sales will increase by about $10 billion.
past and future challenges
While analysts believe Supermicro’s future remains bright after its stock price soared, the company faces some challenges. The company’s chief financial officer and a co-founder resigned after an internal audit that began in 2017 resulted in revisions to the company’s previous financial statements. In 2020, the Securities and Exchange Commission (SEC) accused the company’s former chief financial officer of violating accounting rules, and later reached a settlement agreement in the lawsuit.
Liang said those troubles are behind him and the company is now focused on ensuring it stays ahead of rivals in the increasingly fierce battle for market share in AI computing. Even after Supermicro’s recent growth, the company’s two main competitors, Dell Technologies and Hewlett Packard Enterprise, still have more employees and more than double Supermicro’s revenue.
The AI processor market is expected to continue to grow rapidly. Chipmaker Advanced Micro Devices expects the AI accelerator market to reach $400 billion by 2027, and analysts expect demand for servers to grow in tandem.
In Supermicro’s latest quarterly report, AI-oriented servers accounted for more than half of the company’s nearly $3.7 billion in sales. By comparison, Dell and HPE had similar server sales of $800 million and more than $400 million, respectively.
Analysts are divided on whether Supermicro can maintain its position in the long term. Wedbush analyst Matt Bryson said that historically, no company selling servers has had more than 30% market share.
Bryson said there’s no reason why Dell shouldn’t do what they’re doing.
Other analysts don’t think so. Some analysts say it’s difficult for established rivals to bring new products to market so quickly and that their larger sources of revenue are software and services.
Supermicro is trying to further expand its market share by investing more in AI and continuing to ship servers at a rapid pace. Supermicro is also keeping prices low to attract new customers: The company’s gross margins totaled about 15% in the most recent quarter, down from 17% in the previous quarter. By comparison, HPE’s gross margin in its most recent quarter was 36%.
“In order to capture market share, we will be more competitive on pricing in order to seize opportunities,” Chief Financial Officer David Weigand said on the company’s earnings call in January.
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