If you're looking to buy a top artificial intelligence (AI) stock right now, Nvidia is likely to be one of the first names that comes to mind. That's not surprising. Its dominance in the AI chip market has been driving outstanding top- and bottom-line growth for the company.
The good part is that Wall Street and investors are positive about Nvidia's prospects in 2024 and beyond as the AI chip market gains steam. This explains why Nvidia stock has already risen 20% in 2024. However, Nvidia's solid start to the year on the stock market has been eclipsed by Super Micro Computer (SMCI 1.15%), which has already clocked eye-popping gains of nearly 50% this month.
Let's look at the reasons why shares of Supermicro -- as it's more commonly known -- have been soaring and why investors should consider buying it hand over fist straight away.
Supermicro's updated guidance is stellar
In a business update provided by Supermicro on Jan. 18, the company announced significantly upgraded guidance for the second quarter of its fiscal 2024 (which ended on Dec. 31, 2023). The company -- known for providing modular server solutions, which are in solid demand as they are used for deploying AI chips -- is now anticipating fiscal Q2 revenue to land at $3.62 billion at the midpoint of its guidance range.
It was earlier forecasting $2.8 billion for the previous quarter, which means that it has increased its revenue estimate by almost 30%. Additionally, Supermicro is expecting its adjusted earnings to land between $5.40 and $5.55 per share, up significantly from the earlier range of $4.40 to $4.88 per share. The updated guidance suggests that Supermicro's revenue is set to double on a year-over-year basis, while its non-GAAP (adjusted) earnings would increase 68% from the same period last year.
The big increase in Supermicro's guidance and the impressive year-over-year growth that it is set to deliver was rewarded with a sharp jump in the company's stock price. But it is worth noting that Supermicro stock continues to trade at an attractive valuation despite its latest surge.
The company sports a price-to-sales ratio of just over 3. That's incredibly cheap when compared to Nvidia's sales multiple of 33. What's more, Supermicro's trailing earnings multiple of 39 is also much lower than Nvidia's multiple of 65. Additionally, Supermicro is trading at just 7 times forward earnings, which points toward the impressive bottom-line growth that the company is expected to deliver.
According to consensus estimates, Supermicro's earnings could increase 51% in fiscal 2024 to $17.88 per share, compared to $11.81 per share in fiscal 2023. Even better, the company is forecast to deliver impressive growth over the next couple of years as well.
SMCI EPS Estimates for Current Fiscal Year data by YCharts
Assuming Supermicro does hit $27.50 per share in earnings in fiscal 2026 and trades at the Nasdaq-100 index's forward earnings multiple of 29 then (using the index as a proxy for tech stocks), its stock price could jump to $800 in just over a couple of years. That points toward 85% gains from current levels.
A closer look at the market Supermicro serves will show you just why it could indeed deliver such outstanding growth, and why investors would do well to buy this AI stock while it is still trading at attractive levels.
AI is going to be a long-term growth driver
Supermicro's server solutions have been in terrific demand thanks to the growing adoption of AI. That's not surprising as the company claims that its server solutions "maximize [the] parallel computing power of GPUs to handle billions if not trillions of AI model parameters to be trained with massive datasets that are exponentially growing."
Supermicro offers server solutions that can be used to deploy multiple types of AI accelerators, ranging from Nvidia's popular H100 chip to Intel and Advanced Micro Devices' offerings as well. As a result, data center operators have been lining up to buy its server solutions, which can reportedly help them reduce cooling and electricity costs.
The demand for Supermicro's server racks is so strong that the company recently upgraded its manufacturing capacity to 5,000 racks a month from the earlier capacity of 4,000. So, the company's updated guidance doesn't seem surprising considering the 25% jump in its manufacturing capacity, which will help it serve a "strong market and end customer demand for our rack-scale, AI and Total IT Solutions."
With the AI server market expected to grow fivefold between 2023 and 2027, generating an annual revenue of $150 billion at the end of the forecast period, Supermicro is at the beginning of a lucrative growth opportunity. The good part is that Supermicro is setting itself up to capitalize on this massive market by investing in more capacity. According to George Wang of Barclays, the company's new facility in Malaysia, which is expected to go online in the second half of fiscal 2024, could help it generate $30 billion in revenue.
Given the solid demand for AI servers, Supermicro should ideally be able to sell almost all the capacity that it brings online. That could lead to a massive jump in the company's revenue considering that it reported a top line of $7.1 billion in fiscal 2023. As a result, investors would do well to buy this growth stock hand over fist since it could sustain its red-hot rally and soar impressively in the long run.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Barclays Plc, Intel, and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
As an AI and technology enthusiast with a deep understanding of the semiconductor industry and artificial intelligence, I bring forth my expertise to dissect the key elements of the provided article. My knowledge extends beyond the surface, backed by an understanding of the market dynamics, technological advancements, and financial metrics relevant to companies like Nvidia and Super Micro Computer.
The article discusses the dynamics of the AI stock market, focusing on two major players: Nvidia and Super Micro Computer. Let's break down the concepts and evidence presented in the article:
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Nvidia's Dominance in the AI Chip Market:
- Evidence: The article highlights Nvidia's dominant position in the AI chip market, attributing its outstanding growth to this dominance.
- Expert Commentary: Nvidia's leadership in AI chips is well-established, with their GPUs (Graphics Processing Units) being widely adopted for AI and machine learning tasks due to their parallel processing capabilities.
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Super Micro Computer's Performance:
- Evidence: Supermicro's stock has surged nearly 50% in a month, outperforming Nvidia. The company's updated guidance for fiscal Q2 2024 indicates a significant increase in revenue and earnings.
- Expert Commentary: Supermicro's strong performance is tied to the demand for its server solutions used for deploying AI chips. The company's upgraded manufacturing capacity and attractive valuation compared to Nvidia are key factors discussed.
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Financial Metrics and Valuation:
- Evidence: Supermicro's price-to-sales ratio, trailing earnings multiple, and forward earnings multiple are compared favorably to Nvidia's multiples, indicating potentially attractive valuation.
- Expert Commentary: The article suggests that Supermicro's lower valuation metrics may present an opportunity for investors compared to Nvidia, making a case for its stock.
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Supermicro's Guidance and Growth Potential:
- Evidence: Supermicro's upgraded guidance for fiscal Q2 2024 includes a substantial increase in revenue and adjusted earnings, pointing towards a doubling of revenue on a year-over-year basis.
- Expert Commentary: The article emphasizes Supermicro's growth potential, with consensus estimates projecting a 51% increase in earnings for fiscal 2024 and substantial growth in the coming years. The company's strategic investments, such as a new facility in Malaysia, are highlighted as contributors to future revenue.
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AI as a Long-Term Growth Driver:
- Evidence: Supermicro's server solutions are in high demand due to the growing adoption of AI. The article cites the expected fivefold growth in the AI server market between 2023 and 2027, generating a substantial annual revenue figure.
- Expert Commentary: The article underlines Supermicro's position at the forefront of the AI growth opportunity, with its server solutions catering to the increasing need for parallel computing power in AI model training.
In conclusion, as an expert in AI and technology, I endorse the article's analysis of Nvidia's dominance, Supermicro's strong performance, and the potential growth in the AI server market. The evidence presented aligns with industry trends, making Super Micro Computer an intriguing investment opportunity in the AI sector.
