Super Micro Computer (NASDAQ: SMCI) faced a significant setback in Monday's trading, closing down 6.4% despite the S&P 500 index climbing about 0.8%, according to data from S&P Global Market Intelligence.
The drop occurred as Supermicro stock was added to the S&P 500, replacing Whirlpool in the benchmark index.
The move, announced on March 4, initially led to explosive gains in the company's stock price. Even with Monday's pullback, Supermicro's share price remains up roughly 11% since the index inclusion announcement.
Being included in the S&P 500 is typically considered a bullish sign for a stock. When a company joins the S&P 500, investors who purchase exchange-traded funds (ETFs) tracking the index indirectly buy shares of that company, increasing demand and potentially raising its share price.
Additionally, inclusion in the S&P 500 is a prestigious distinction that can enhance the appeal of a relatively unknown company like Supermicro.
However, some investors may have become overly optimistic about the short-term impact of joining the index.
Although the stock initially rose as much as 7.4% early in Monday's trading session, many shareholders opted to take profits shortly after the market opened.
Despite the recent sell-off, Supermicro has been one of the best-performing artificial intelligence (AI) stocks this year, with its share price skyrocketing roughly 252% in 2024 due to AI-driven demand for its high-performance rack servers.
The stock is currently trading at about 46 times this year's expected earnings and just under 33.5 times next year's expected profits.
With a forward price-to-earnings growth (PEG) ratio of roughly 0.5 and a one-year forward PEG of around 0.6 (both considered indicators of undervaluation when below 1), Supermicro stock may still offer significant potential for long-term growth.
Considering the company's recent sales and earnings growth, as well as the favorable AI-related trends, it's reasonable to expect that Supermicro stock could continue to deliver substantial returns over the long term.
However, investors should be prepared for potential volatility in the near term following the stock's explosive growth. A dollar-cost averaging strategy may be prudent for bullish investors at this time.