Shares of server and storage-solution specialist Super Micro Computer (SMCI 18.65%), also known as Supermicro, resumed their relentless rise Monday, surging as much as 21.1%. As of 10:43 a.m. ET, the stock was still up 18.4%.
The catalyst that sent the artificial intelligence (AI) stock higher was an announcement it would be joining a major trading index.
Joining the S&P 500
An announcement released after market close on Friday revealed that Supermicro would be joining the S&P 500. The stock will be replacing home appliance specialist Whirlpool when the market opens on March 18. In a press release marking the occasion, S&P Global noted, “the changes ensure that each index is more representative of its market capitalization rage.”
To be eligible to join the S&P 500, a company must be based in the U.S. and have a market cap of at least $8.2 billion. Additionally, at least 50% of its shares must be publicly traded, and the company must have been profitable in each of the previous four quarters.
Stocks often rally when they’re added to the benchmark index because funds and institutional investors that track the major indexes must buy shares to duplicate their holdings. However, the rally usually subsides once the benchmark-related buying is done.
Reason to buy the stock?
Just because a stock is joining a particular index is no reason to buy the stock. Rather, investors should look to the company’s underlying operating and financial results to determine whether it’s worth owning.
In the company’s fiscal 2024 second quarter (ended Dec. 31), Supermicro produced net sales that soared 103% year over year to $3.66 billion. This resulted in adjusted earnings per share (EPS) that surged 71% to $5.59. Management was clear that the record revenue was the result of strong demand for rack-scale servers used for AI. These impressive results were likely the catalyst that prompted its inclusion in the S&P 500.
Investors should also factor in the valuation of a company when making their buying decisions. Supermicro is currently selling for just 2x forward sales, which is the standard for an undervalued stock. This suggests that despite the stock’s 1,000% rise over the past year, there’s still additional upside ahead.
Danny Vena has positions in Super Micro Computer. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
