The Rally in Super Micro Computer (SMCI) Shares Faces Headwinds From Its Insiders, Established Historical Precedents, Goldman Sachs, and Jim Cramer

This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

Super Micro Computer (SMCI) shares have added over $6.5 billion in market capitalization since Friday's after-hours trading session when the news first emerged that the stock will enter the benchmark S&P 500 index on the 18th of March. With comparisons to Tesla's blistering pre-S&P 500 inclusion rally quickly populating the Fintwit sphere, everyone and their proverbial pet dog seems to have jumped on the long-only bandwagon. Yet, Super Micro Computer shares now face a confluence of risk factors that can jeopardize the stock's performance.

This is incredible:

After the market closed yesterday, it was announced that Super Micro Computer, $SMCI, will be joining the S&P 500.

As a result, the stock jumped 12.5% adding $6.5 BILLION in market cap.

It's now back above $1,000/share and just 5% from hitting a new all… pic.twitter.com/DLnRUjC2yR

— The Kobeissi Letter (@KobeissiLetter) March 2, 2024

Reuters broke the news last week that Super Micro Computer was all set to be included in the S&P 500 index on the 18th of March. Since then, the stock is up 15 percent and back above the psychologically important $1,000 share price.

So, why is this a big development for SMCI? Well, the S&P 500 is one of the most sought-after equity indexes in the world, with institutional investors, pension funds, hedge funds, and algorithmic trading units all vying for exposure to the benchmark index via a plethora of ETFs and futures contracts. Super Micro Computer's inclusion in the S&P 500 will unleash a vast reservoir of institutional demand for its shares, as per the prevailing conventional wisdom.

Of course, even before this development, SMCI shares were riding the proverbial high horse, courtesy of the NVIDIA effect. As we noted in a previous post, Super Micro Computer's biggest client is NVIDIA, and its second-biggest client is an entity that is backed by NVIDIA. The company manufactures high-performance servers, which are in high demand right now, given the ongoing gold rush to train and deploy AI-powered solutions for diverse products and services.

Yet, SMCI faces a confluence of emerging risk factors that can jeopardize the prospects of its ongoing blistering rally.

Historical Precedents

$SMCI

Just for some perspective. Here is $TSLA journey to S&P. That was 1K move pre-split.

Where do you think will $SMCI end up by March 18 ? pic.twitter.com/wsVFrO23Jp

— AM Alerts (@ani1225) March 2, 2024

Between the 17th of November 2020, when Tesla was selected for inclusion in the S&P 500 index, and the 18th of December 2020, when the stock was actually included in the benchmark index, the shares of the EV giant rallied by around 60 percent. Super Micro Computer bulls expect the stock to replicate Tesla's blistering gains.

However, as per a tabulation by Research Affiliates, the stocks that are added to the S&P 500 index go on to show material underperformance. For instance, AIV - the stock that Tesla replaced in the benchmark index in 2020 - managed to outperform the EV giant's stock market gains by 78 percent over the next 6 months. According to Research Affiliates, while S&P 500 deletions underperform additions by an average of 6.2 percent between the announcement date and the actual date of rebalancing, they tend to beat the market by an average of 20 percent over the next 12 months following the rebalancing event.

Super Micro Computer Insiders are Selling

As per a tabulation by Barchart, insiders have bought just 2,000 SMCI shares over the past 3 months as opposed to sales of 105,081 shares.

Super Micro Computer's SVP of Worldwide Sales sold $25 million right at the top on Feb 15. Not suspicious at all.

Wonder what he knows? 😏$SMCI https://t.co/vNvKSeI16n pic.twitter.com/nY69V01lmR

— Financelot (@FinanceLancelot) February 28, 2024

Moreover, Super Micro Computer's SVP of global sales recently sold $25 million worth of shares. Of course, insiders do liquidate shares when the stock price is high. However, the severely skewed nature of SMCI's insider buy-to-sell ratio is a cause of concern, potentially hinting at a lack of internal confidence.

Goldman Sachs Initiates Coverage of Super Micro Computer with a Target of $941 Per Share

Goldman Initiated Coverage on $SMCI with 'Neutral' rating and Price Target of $941.

The gain of nearly a 1,000% since start of 2023 in Super Micro's was attributed to a tripling in earnings and a P/E multiple expansion to 32x NTM, aligning closely with NVIDIA's 32x NTM P/E…

— Wall St Engine (@wallstengine) March 4, 2024

What's more, Goldman Sachs has now initiated SMCI's coverage with a neutral rating and a stock price target of $941 per share, indicating a downside potential of around 10 percent relative to the current stock price. The Wall Street giant expects Super Micro Computer's annual revenue growth to slow down to 51 percent in 2025 and then to just 9 percent thereafter.

Cramer Curse

RIP Super Micro Computer $SMCI - It was a fun ride pic.twitter.com/ZMBfjUUbzt

— Barchart (@Barchart) March 1, 2024

We noted in a previous post that Jim Cramer has gone bullish on SMCI, unleashing the dreaded Cramer Curse that sees almost all of Cramer's endorsements underperform, courtesy of the fact that the CNBC host's roving eyes tend to land on a particular stock only when the laws of gravity are about to exert their influence.

Well, Jim Cramer expressed positive views about Super Micro Computer on Friday, after Reuters' S&P 500 inclusion report, which sets the stage for the wrath of the stock market gods to now strike this high-flying stock.

Follow Wccftech on Google to get more of our news coverage in your feeds.