Needham & Company Lifts PT on Super Micro Computer (SMCI) After Meetings

May 13, 2013 10:57 AM EDT
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Needham & Company boosted its price target on Super Micro Computer (NASDAQ: SMCI) from $12 to $13 following meetings they hosted between the CFO and investors.

Analyst Glenn Hanus notes while the recent EPS call left them somewhat discouraged due to the challenging server environment, somewhat increased competition and target model reduction, the tone on this call "was more positive and clarification helpful."

Highlights from the meeting:
  • SuperMicro continues to grow (12-16%) about 4x the rate of the $40B x86 Server market, taking share mostly from Tier 1 OEM. The "optimized" market represents about 10-15% of the overall market.

  • While the landscape has become more competitive, issues/uncertainties with the major vendors (i.e., Dell LBO?, HP in difficulties losing share to Cisco UCS, IBM selling x86 to Lenovo?) are helping to open new opportunities to SMCI. An example is in financial services, where SMCI’s power/density benefits seem to be helping it gain traction. We believe SMCI’s relative stability is also helping to open doors. It sells on a TCO/ROI basis and can command a slight acquisition price premium vs. volume server suppliers.

  • While it does not discuss specific Internet Data Center (IDC) customers, SMCI is seeing good traction at a number of the recent IPO companies where they have done well based on density/power efficiency advantages. They also have had some success in selling storage into these accounts. Its GM% in the IDC vertical improved in the recent quarter.

  • GM% is a key investment issue discussed at all meetings. SMCI lost about 300bpts GM% following the Asian floods and HDD shortage. It has regained about 100 bpts from improved stability in component pricing. Its model is to expand GM% about 200 bpts+ over the next 12-18 months driven by 4 factors, listed here by order of magnitude – a) Taiwan facility has 3 lines recently running at ~25% utilization. It is committed to increase to 60% by the end of C13 through a combination of Asian-based customers and moving pre-final assembly activities from San Jose to Taiwan; b) continued strategic focus on increasing complete systems sales (as a %, recently 42%); c) some benefit from purchasing power as company scales; and d) system management software/services offerings. SMCI has about 75 software engineers and has developed system management software to match competitors, thus better positioning itself for enterprise customers and more demanding and lucrative vertical markets

  • SMCI tends to perform better during periods of technology change. Ivy Bridge appears to be progressing ok and is anticipated in late C3Q timeframe.

  • SMCI's relatively new product offerings (FatTwin, MicroCloud, storage, GPU systems) appear to be gaining solid traction.

    For an analyst ratings summary and ratings history on Super Micro Computer click here. For more ratings news on Super Micro Computer click here.

    Shares of Super Micro Computer closed at $10.05 yesterday.

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