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1 Top Growth Stock Down 58% to Buy Before It Is Too Late

Super Micro Computer (NASDAQ: SMCI) has been one of the hottest stocks on the market this year, clocking tremendous gains of 73% as of this writing, but a closer look at the stock’s more recent performance tells us that its bull run has come to an end. In fact, shares of Supermicro (as the company is known) are down 58% since hitting a 52-week high on March 8.

However, the company, which manufactures server and storage solutions, has been enjoying phenomenal growth thanks to the booming demand for artificial intelligence (AI) servers, and that remains a hot industry. Let’s take a closer look at Supermicro’s prospects and check if the recent pullback in the stock is a buying opportunity.

The stock’s recent pullback doesn’t seem justified

Supermicro released its fourth-quarter fiscal 2024 results for the three months ended June 30 on Aug. 6. The company’s revenue for the year shot up an impressive 110% to roughly $15 billion. Adjusted earnings also nearly doubled to $22.09 per share from $11.81 per share in fiscal 2023. Throw in the stock’s attractive valuation, and it looks like investors would do well to buy it hand over fist right now.

Supermicro has a price-to-sales (P/S) ratio of just 2. That represents a big discount to the U.S. technology sector’s multiple of 7.8. Meanwhile, Supermicro’s forward earnings multiple of just 14 is also way cheaper than the U.S. technology sector’s earnings multiple of 45. We have already seen how fast Supermicro has been growing, and the recent pullback has given investors a solid entry point into this stock that could sustain its outstanding growth for a long time to come.

Investors should focus on the bigger picture

A fiscal 2025 revenue estimate of $26 billion to $30 billion suggests that the company could double its revenue once again this year. The good part is that Supermicro is sitting on a massive long-term growth opportunity in AI servers. According to one estimate, the size of the global AI server market could increase at a compound annual growth rate (CAGR) of 30% over the next decade, generating $430 billion in annual revenue at the end of the forecast period. That would be a growth of over tenfold from the $40 billion in revenue that the AI server market is estimated to generate in 2024.

Supermicro is one of the best ways to play this massive growth opportunity as the company’s share of the AI server market is expected to keep growing nicely in the future. According to Bank of America, Supermicro controlled 10% of the AI server market last year. Its share of this market is forecast to grow to 17% in 2026, and that won’t be surprising as it has been aggressively looking to increase its manufacturing capacity.

Management has been consistently making moves to ensure that Supermicro can produce more server racks each month, so that it can keep growing at a terrific pace. For instance, in June, the company announced the addition of three new manufacturing facilities in order to meet the growing demand for liquid-cooled servers that are gaining prominence thanks to the adoption of AI.

It is not surprising to see why analysts are forecasting Supermicro’s earnings to increase at an annual rate of 62% for the next five years. Applying that growth rate to the company’s fiscal 2024 earnings of $22.09 per share points toward a bottom line of $246 per share after five years. If you multiply the projected earnings with the Nasdaq-100’s average-earnings multiple of 32, Supermicro stock would be trading at more than $7,800 a share after five years.

Investors, however, should note that Supermicro has announced a 10-for-1 stock split that will go into effect on Oct. 1. But a stock split is simply a cosmetic move that increases the number of outstanding shares of a company to reduce the price of each share, so it won’t do anything to alter Supermicro’s fundamentals and prospects.

If the market starts rewarding Supermicro stock fairly for the outstanding growth it has been clocking — and could keep delivering in the long run — it could make investors significantly richer. That’s why investors would do well to add this growth stock to their portfolios while it is still cheap.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

1 Top Growth Stock Down 58% to Buy Before It Is Too Late was originally published by The Motley Fool