GOING UP AGAINST

hulking giants

Hewlett-Packard

International Business Machines

Dell

Super Micro Computer

Super Micro, of San Jose, Calif., has been around for 14 years but it only went public in March. That's helped keep its unique abilities and cheap shares off investors' screens. The company's secret is what it calls "application optimized solutions." That's essentially the capability to custom-fit servers for clients' specific needs. H-P and IBM each hold nearly 30% of the server market, according to market research firm IDC, while Dell and Sun Microsystems claim about 22% evenly split between them. But the big boys offer perhaps only a couple dozen different servers. That's kind of like buying a fine suit off the rack.

"We offer hundreds of different optimized solutions," says Charles Liang, Super Micro's chairman and chief executive. "So we can make sure that customers have a truly optimized solution that minimizes their expense and maximizes their performance."

Super Micro's able to offer so many different products thanks to what it calls its building-block architecture. "It's like the way kids play with Legos," Liang says. Super Micro's server parts, such as the chassis or the power supply, are modular and inter-compatible, meaning they can be quickly snapped together to create one of 600 or so different servers tailored to a customer's specifications. And while its giant rivals outsource their engineers and components to far-flung corners of the globe, Super Micro keeps pretty much everything under one roof.

That centralization, combined with Lego-like assembly, allows the company to incorporate the latest advances in technology and get them to market in as little as one to six months. It also offers something of a bulwark against the much bigger competition, which would have to rethink and reorganize operations in order to copy it. In another bit of defense, it also helps that no single customer the client roster includes Juniper Networks, Siemens and Los Alamos National Labs accounts for more than 10% of sales. The revenue base is also geographically diverse, with international customers contributing 40% of the total.

IDC forecasts that Super Micro's primary market will post a compound annual growth rate of nearly 7% a year to $40 billion by 2010. At the same time, the company has recently entered the exploding blade server market, which is expected to post a 46% compound annual growth rate to $9.6 billion in less than two years. And more immediately, the CPU arms race between Intel and Advanced Micro Devices is also likely to boost results.

"The quad-core chip releases from Intel and AMD should help drive revenues and gross margin in fiscal 2008 as Super Micro typically performs best immediately following such a release," wrote Needham analyst Glenn Hanus, who rates shares at Buy, in an Aug. 8 report. (The other analyst covering the stock, Merrill Lynch's Richard Farmer, also calls it a Buy.)

Those faster chips from the Intel-AMD duopoly should only add more power to what has already been an impressive growth story. Sales have doubled in the last two years to $420 million in fiscal 2007 (ended June) and the Street expects them to grow another 28% this year, according to Thomson Financial. Earnings per share are forecast to increase 20% for fiscal 2008.

But that growth story has yet to show up the share price. The stock opened at $8.85 in its March 29 debut and is down 5.4% to $8.37 as of Thursday's close. That lags the tech-heavy Nasdaq Composite Index by more than 10 percentage points over the same period and has made the valuation deeply compelling. The forward price/earnings multiple of 10 offers a 70% discount to peers and a 33% discount to the broader market. The forward price/earnings-to-growth, or PEG, ratio, at 0.5, presents an 80% discount to peers and nearly 60% to the S&P 500. (PEG measures how expensive a stock is relative to its growth prospects.) Meanwhile, analysts' average price target of $14.50 implies an upside of more than 70% in the next 12 months or so.

"We continue to believe the stock is undervalued...in the context of sustainable top and bottom line growth of around 20%," Farmer wrote a couple of weeks ago.

CEO Liang acknowledges that the company needs to raise its profile on the Street. He's an engineer first and foremost, spending the last 14 years creating "application optimized solutions," not multiple expansion. Nevertheless, a stock with 20% earnings growth trading at only 10 times forward earnings should serve as a pretty optimal application to just about any tech portfolio.