DA Davidson Upgrades Super Micro Computer Despite Tough Comps

D.A. Davidson upgraded Super Micro Computer, Inc. SMCI to Buy from Neutral on margin benefits from success of server sales outside the Internet Data Center vertical, while the company is set to deliver a seasonally strong quarter in December.

The bullish thesis is also based on growth in storage business and a pending server upgrade cycle in mid-2017 in the form of Sky Lake.

The upgrade comes despite SMCI faces a difficult year-over-year comparison for December, as the December 2015 quarter included a large deployment for IBM/Softlayer, which accounted for 15 percent revenue in the quarter.

But, this year, the Softlayer division of International Business Machines Corp. IBM is lumpy and the brokerage expects non-IBM/Softlayer revenue to increase 12 percent.

On the storage front, the brokerage pointed out that SMCI has become the "hardware platform of choice" onto which many new storage vendors are building storage management software stacks. Last quarter, storage sales represented 23.5 percent of revenue, up from 17.6 percent last year.

“With fast-growing storage vendors such as Nutanix Inc NTNX, Nimble Storage Inc NMBL, and Nexenta building software on SMCI hardware, we believe the storage vertical should continue to drive top line growth,” analyst Mark Kelleher wrote in a note.

Kelleher also expects SMCI to deliver improved margins as growing demand should help drive revenue and utilize the excess manufacturing capacity is utilized. Last quarter, the gross margin improved 101bp sequentially, while operating margin moved to 4.7 percent from 3.1 percent.

Shares of SMCI closed Tuesday’s trading at $26.10.