This was an epic week – the adoption of the AI infrastructure build cycle is J-curving in real time.
Super Micro Computer, Inc. (SMCI) - the leader in scaling next-gen AI compute hardware with its innovative and GREEN building block servers – gave the pre-announcement of the year. SMCI upped its revenue estimate for Q2 by $800M, from $2.8B (at the mid-point) to $3.625B, with EPS guided higher by 20% to $5.47ish:
Not only is that 70% sales growth Quarter-over-Quarter, the Year-over-Year growth rate is also accelerating markedly to triple-digit rates for the upcoming March quarter – where we still see big upside, relative to consensus:
Forward consensus still is too low at $21.31. For June 2025, EPS of $26+ seems very likely when you consider the company exited December at a $22 annualized run rate:
Best-in-breed Top Tier Inflections like Super Micro do not happen overnight. The company has been preparing for this moment for almost 30 years, expanding capacity domestically in California, in Taiwan the past two years, and now, Malaysia:
Scaling AI requires combining servers into AI clusters – where power efficiency is a paramount. Liquid Cooling is a technology gaining important mindshare in data centers. It requires fewer fans, decreasing the power needed to cool the servers, thereby also supporting heat recovery and reuse. We believe Liquid Cooling is the future of data centers. While they can take a while to design, Liquid Cooling reduces CAPEX by 40%, a cost savings too big to ignore.
By 2027, Liquid Cooling could be an $80B TAM. We think Super Micro will own Liquid Cooling as its adoption begins to J-Curve. Remember, fifty percent of Super Micro’s staff are computer engineers. Its CEO, Charles Liang, is one of the top engineers in the world and still getting his hands dirty too.
With its deep expertise in Liquid Cooling, along with its offerings which provide the Lowest Total Cost of Ownership and Energy Efficiency, hyper-scalers went all-in with Super Micro in late 2023. I attach 80% odds this momentum carries through 2024:
While it’s natural to question the sustainability of such a big ramp - were some large, one-time projects pushed into this Q, perhaps? – if history is any guide, a major guide up by Super Micro has been followed by another large beat in the following quarter.
Clearly, one risk for Super Micro is margin degradation. Hyer-scalers have the power to squeeze Super Micro on margins as they scale further with the co in the coming quarters. Something to be cognizant of and watchful for. This risk seems muted though with the SMCI increasing pricing 13% YoY on most products.
As for additional catalysts, we see two important ones.
First, the Super Micro typically sees mid-single-digit growth QoQ from its December to March quarters, implying that June estimates are too low. A strong guide up when the SMCI reports numbers on Jan 29th would serve as another incremental driver for the shares.
We think $500 is coming this quarter, potentially, even faster than we are anticipating. Currently, the stock is trading for 16x our forward EPS estimate for its next fiscal year. A $500 stock price would only translate into a 19x forward multiple.
With this type of growth, why shouldn’t SMCI catapult to a 25x peak forward multiple? After all, like its partner NVIDIA Corp., from its founding nearly 30 years ago, Super Micro is one of the most important enablers in the world for scaling AI. A 25x P/E gets the stock to $650ish.
Speaking of NVDA, the raised guide by SMCI strongly increased the odds that reports of the eventual air pocket in AI infrastructure build-out are greatly exaggerated. NVDA’s results should crush expectations. We expect a strong Beat n Raise by NVDA when it reports in late February. This should be the second big catalyst to prepare for, and the reason to hold an outsized position in SMCI until our $500-$600PTs are reached.
Turning to the technicals, SMCI blasted through a powerful 5-month basing pattern on Friday. While some of the 4M shorts clearly covered, make no mistake, the footprint from Friday’s buying stampede was a volume inflection of 8x average volume pushing the stock to all-time highs.
The first Measured Move brings us to $475-$500 on the chart:
SMCI’s double-barreled, explosive Fundamental and Price/Volume inflection should usher in one of the most memorable moves you will see this year in stocks.
To this end, while $500 is our target this quarter, longer-term, we attach 60% odds an overshoot to $600-$700 occurs. The explosion in volume is best seen on the 60-Minute Intra-Day Chart:
Currently, there are only ~1,100 funds long SMCI. NVDA has 7,600 funds invested. Add in the tight share structure at play here – 55M shares outstanding, with CEO Charles Liang and Blackrock & Vanguard collectively owning 27% of the available float – and SMCI has a wonderful asymmetric set-up.
We see hardly any downside in the short-term time frame, with massive support down to $400. Accordingly, we plan to top off this #1 position in the accounts we oversee on ANY AND ALL DIPS to $415, $410…$400…
The key here is to average into your stake and ride this screaming Inflection Point for a long-term Winner.
Playing into the theme for sharply increased power and cooling requirements to actualize AI scaling initiatives, Credo Technology Group (CRDO) inflected on Friday, emerging from a powerful weekly formation to all-time highs.
$24-$25 is our first target and $30-$35 by year-end seem like good odds to us.
By then, numerous new and very large back-end AI ramps with both Microsoft and Amazon will be in full swing, not to mention the dozens of other Credo customers with the scores of additional product family ramps forthcoming.
Exciting stuff going on at Credo. On many fronts, this week was historical for the proliferation of AI.
Turning to a new theme, investors are leaning into smartphone-related plays. Yes, smartphone plays that will enable AI features to be produced on the next generation of AI enabled smartphones.
Samsung released what should prove to be the first mass-market AI smartphone, the Galaxy 24. While the G24 is priced at a lofty $1,300, with numerous AI additions to this model and no charges on them until late 2025, I think consumers will happily pay up to add AI to their indispensable hand-held computer.
I know I plan to.
On the flip side, I could see consumers buying this phone to adopt Chat Assistant and Note Assistant. Here are some early reviews.
Well, the market has certainly caught notice. With future iterations of AI smartphones set to be released later this year, and particularly in 2025, investors are now latching onto a new investment theme: AI extending to the edge, with the advent of an AI-driven smartphone upgrade-cycle occurring in earnest in 2025.
Apple Inc. (AAPL) looked like a short a week ago. Now, $180 looks like the retest, buy-the-dip zone:
BofA upgraded AAPL earlier in the week on this upcoming multi-year iPhone upgrade-cycle driven by the need for the latest hardware needed to enable the AI features on these AI-enabled smartphones.
For us, the BEST WAY to play this upcoming AI upgrade-cycle over the next 18 months, is to own Qualcomm Inc (QCOM), whose Snapdragon chip is powering Samsung’s AI phone and will also be powering scores of additional AI-enabled smartphones.
QCOM stock broke out definitively to 18mo highs last week, finishing strongly with a new kick in its step.
We see $200-$250 for the stock over the next 12-18 months:
Forward consensus looks way too low in Qualcomm. It has been years since there was a strong smartphone upgrade cycle.
I think 2025 is a gangbuster year for the smartphone guys. Qualcomm should clean up. The potential for $12-$15 in EPS over the next two fiscal years extending to Sep’26 provides us a strategic asymmetric entry in Qualcomm at current levels, and on dips to the mid-to-high $140s. Note the impressive dispersion in our numbers, relative to forward consensus below.
This dispersion should widen in the coming quarters, catalyzing the shares to $250 over the long-term.
Encouragingly, the downside risk in QCOM seems muted too, with valuation strongly supporting the stock on any potential price drift back down to the low-$140s, should a sudden market downturn occur.
As such, we plan to add to our QCOM position on its first flush or two next week.
To be frank, considering the value in the stock at current levels AND taking into account the stock has not done much the past few years, we will be averaging into the stock and into the Jan ’25 140 calls throughout the day on Monday, as well.
Going to leave it there.
Two Top Tier Inflections for you that are easy to digest and immediately actionable on Monday.
We are working on a number of additional Inflection Points and will be out with additional picks shortly.
Stay tuned.
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Disclosure: We are long outsized positions in both SMCI and QCOM in the accounts we oversee. Our SMCI position is 5x bigger than our QCOM position.
Disclaimer: In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in these names at a moment’s notice without updating you on any such change in opinion and positioning.
Investors need to consider their investment risk tolerance before investing in the stock market and also before investing in any of the stocks mentioned in this report.
