Analysis of Super Micro Computer (SMCI) Based on Benjamin Graham's Criteria

Key Metrics and Data Points

• Current Stock Price: $41.31
• Graham Number: $116.73 (calculated as √(22.5 * 5-year average EPS * book value per share))
  • Implies the stock is trading at a 64.6% discount to its fair value.

Sales Revenue

• 5-Year Average Sales Revenue: $6.85 Billion
  • Meets Graham's threshold (originally $100 million, adjusted for inflation).
  • Indicates strong revenue growth and market presence.

Liquidity and Debt Ratios

• Current Ratio: 2.43 (calculated as Total Current Assets / Total Current Liabilities)
  • Excellent liquidity position, with current assets outweighing liabilities by a factor of 2.43.
• Long-term Debt to Net Current Assets Ratio: 0.0
  • Indicates no long-term debt relative to net current assets, suggesting financial stability.

Retained Earnings

• 5-Year Average Retained Earnings: $685.16 Million
  • Demonstrates a strong history of retaining earnings, similar to free cash flow metrics.

Dividend History

• No Record of Regular Dividends in the past twenty years.
  • May indicate reinvestment in growth or lack of dividend policy.

Earnings Per Share (EPS) Growth

• 10-Year Average EPS Growth: 531.58%
  • Satisfies Graham's requirement for a minimum increase of at least one-third in EPS over ten years.
  • Exceptional growth compared to historical averages.

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Market Implications and Business Insights

Undervaluation Potential

• Trading at 64.6% below its Graham number, SMCI appears undervalued based on intrinsic value calculations.
• However, the lack of a dividend history and potential reinvestment in growth may influence investor sentiment.

Competitive Dynamics

• Strong sales revenue ($6.85B) and exceptional EPS growth (531.58%) suggest effective execution and market leadership.
• The company's ability to maintain high retained earnings indicates robust profitability and financial health.

Strategic Considerations

• Liquidity Position: A current ratio of 2.43 highlights strong short-term financial stability, reducing risk during economic downturns.
• Debt Management: Zero long-term debt relative to net current assets underscores conservative financing practices.

Long-Term Effects

• Continued EPS growth and revenue expansion could drive sustained shareholder value.
• The company's ability to maintain its margin of safety while growing will be critical for long-term success.

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Conclusion

Super Micro Computer meets most of Benjamin Graham's criteria for an undervalued stock, including strong sales, excellent liquidity, high retained earnings, and exceptional EPS growth. However, the lack of a dividend history and reliance on reinvestment may influence investor decisions. While the stock appears undervalued, further analysis is recommended to assess long-term sustainability and market risks.