Price action is usually the raw opinion of the market on a particular stock or industry, which is why investors should always be aware of what is happening behind the scenes when it comes to risk-on and risk-off behavior throughout the market. Today, the technology sector, particularly semiconductor stocks, have become the poster child of the risk-on for the stock market.

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With this in mind, it is not necessarily the large-cap stocks in this space that will give investors the best gauge of where the market’s sentiment is headed but rather the smaller names that have recently been beaten down in one way or another. For this, shares of Super Micro Computer Inc. SMCI come into play as the perfect gauge for investors to figure out where the market might be headed next.

In reality, shares of NVIDIA Co. NVDA would have been the leaders in the space and the market itself, but considering how much institutional capital is now riding behind this name, any uptick in volatility for the broader S&P 500 will directly affect NVIDIA stock, unlike Super Micro Computer, making the latter the better measure of market sentiment today. Here is what the market says about Super Micro Computer and why it’s doing so.

Outperformance in Super Micro Computer Holds the Answer

Over the past month, as the S&P 500 has fallen into what’s called a “Correction” territory, defined as a 10% decline from recent highs or more, Super Micro Computer has managed to remain in a 1% return level during the period. By outperforming the market by 11% during the month is the foundation for investors to start asking themselves a few questions.

The first one should be what this means for the broader scene. In essence, the risk-on attitude, or appetite, is still very much alive in the market. This means that, as volatility peaks in the S&P 500 in the coming days or weeks, a potential rebound could be right around the corner.

Second, investors are probably wondering why, out of all names in the industry, the market is choosing to reward Super Micro Computer after it had been the subject of a lot of volatility and bearish price action, still being down by 67% over the past 12 months alone.

To recap, investors should be aware that Super Micro Computer just dodged the biggest uncertainty bullet out there. That was the threat of being delisted from the NASDAQ 100 exchange due to being late in its financial filings. That is now over, as the company managed to publish its financials just in time to stay on the exchange and erase most fears.

Considering that the stock still trades around 33% of its 52-week high, which was a level pricing in a potential delisting and borderline fraudulent accusations, the risk-to-reward setup has just shifted to favor buyers in a way that has not been present in a long time, perhaps even making it the best setup in the industry today.

However, there must be reasons beyond this simple technical setup, financial ones, to give investors the confidence they need to move forward with a potential bullish thesis in this name.

The Market’s Take on Super Micro Computer Stock

Before jumping into how the rest of the market feels about Super Micro Computer stock, a few of the recent results should be considered.

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As of the latest quarterly earnings results, Super Micro Computer reported top-line revenue of up to $5.6 billion for the quarter, reflecting a massive 54% annual growth rate to showcase why this stock has gotten preferential price action treatment recently.

More importantly, investors can see the cash flow statements for Super Micro Computer, which reflected a swing from a net operating outflow to a $169.1 million net operating cash flow over the past 12 months. Those who still doubt the company’s potential should lean on this factor, as cash flow is not an item that can be manipulated or shifted around as easily.

All told, the recent results drove analysts from Northland Securities to initiate their coverage on Super Micro Computer stock, this time placing a valuation target of up to $70 per share on it. This new target would call for a net upside potential of as much as 80% from today’s low price, reiterating the fact that the risk-to-reward setup is as good as it comes for this stock.

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The article "How Super Micro Computer Stock Is Defying the Market Sell-Off" first appeared on MarketBeat.