Information technology (IT) specialist Super Micro Computer (NASDAQ:SMCI) is giving semiconductor powerhouse Nvidia (NASDAQ:NVDA) a run for its money. However, the main question here centers on the forward viability of SMCI stock and the rabid enthusiasm for artificial intelligence (AI) related businesses.
Today is providing a reality check for Super Micro Computer, which specializes in high-performance servers and server management solutions. Heading into the afternoon, SMCI stock is down more than 10%. Nevertheless, most analysts are bullish on the security.
As The Wall Street Journal pointed out last year, global spending on AI may exceed $301 billion by 2026. That implies a compound annual growth rate (CAGR) of 26.5%. With AI consuming significant bandwidth, data centers have to keep up. This framework inherently benefits SMCI stock.
Unsurprisingly, Bank of America analyst Ruplu Bhattacharya cited this catalyst when initiating coverage on SMCI. Bhattacharya rated SMCI stock as a “buy” and set a $1,040 price target. Specifically, the expert stated that the company “will be a beneficiary of AI-driven demand growth (>50% of revenues now tied to accelerators like GPUs).”
Still, this optimistic price tag comes amid SMCI stock’s gain of over 200% so far this year, inclusive of Friday’s selloff. Bhattacharya justifies this sentiment by stating that “the market for AI servers is much larger than is factored in Street models.” The analyst also stated that the AI server market may expand at a 50% CAGR over the next three years. That stacks up massively against the overall server market’s “5.5% CAGR over the past 17 years.”
SMCI Stock May Also Have Priced in the Good News
As CNBC points out, BofA’s price target reflects 18% upside from the midweek session’s close. According to FactSet, it’s also the highest target on Wall Street. In fact, SMCI stock “already trades far above the consensus analyst price target of $683.”
Bhattacharya isn’t intimidated by the statistics, noting that the firm has a valuable ability in constructing “server technology from the ground up,” per CNBC. Nevertheless, other experts aren’t so sure.
Wells Fargo analysts also initiated coverage of shares, stating that the AI momentum will continue for SMCI stock. However, Wells Fargo went with an “equal weight” rating, implying a neutral stance.
Moreover, evidence has also materialized that the smart money is getting nervous about Super Micro’s stratospheric run so far this year. For starters, Barchart points out that the put/call open interest ratio stands at 1.43. To be sure, this metric can be deceptive as bullish investors can generate income through sold puts. Nevertheless, the remaining open option positions tilt heavily in favor of put options.
Second, Fintel’s options flow screener — which filters exclusively for big block transactions — shows heavy volume of both bought puts and sold calls. Interestingly, many of the recent strike prices for the sold calls center around the $1,100 to $1,200 range, roughly near BofA’s upside target.
Essentially, these written call options reflect wagers that SMCI stock will not reach the listed strikes. That casts doubt on the sustainability of the rally.
Why It Matters
Interestingly, some speculators are also taking direct bets against SMCI stock. Per Fintel, the short interest for Super Micro stands at 10.58% of its float. To be sure, demand for such an aggressive trade is minimal based on the short borrow fee of only 0.31%. However, it’s something to keep in mind, especially with Nvidia due to release earnings on Feb. 21.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
