Nvidia has been an amazing investment, but Wall Street sees Super Micro Computer as a better AI stock to buy right now.
of Nasdaq-100 tracks the 100 largest non-financial companies in the Nasdaq Composite (^IXIC 0.20%)a growth-focused index heavily weighted toward the technology sector. Super Micro Computer (SMCI -2.31%) will replace Walgreens Boots Alliance on the Nasdaq-100 before the market opens on Monday, July 22.
Supermicro has become popular with investors in recent months because of its role in the artificial intelligence (AI) economy. The company joined S&P 500 (SNPINDEX: ^GSPC) in March, and shares rose 188% during the first half of 2024, surpassing the 150% gain in Nvidia shares.
Wall Street thinks the performance will continue. Supermicro’s average price target of $1,030 per share implies a 16% upside from the current share price of $886. Meanwhile, Nvidia’s average price of $133 per share implies 4% upside from the current share price of $128.
Super Micro Computer has a sustainable competitive advantage
Super Micro Computer designs and builds computing platforms for enterprise data centers and the cloud. Its portfolio includes storage systems and servers, including single appliances and full-rack solutions optimized for AI and high-performance computing. The company has a deep relationship with Nvidia, but also sources chips from suppliers like AMD AND Intel.
According to Supermicro it is “the leading company in the AI computing market”. JPMorgan Chase analyst Samik Chatterjee. Most importantly, it is rapidly gaining market share due to its engineering capabilities and unique building block approach to product development. To elaborate, the company does most of its research and development in-house, and builds pre-assembled servers that can be quickly retrofitted with the latest chips and interconnects.
As a result, Supermicro can typically bring new technologies to market faster than competitors, often by two to six months. Additionally, because those server building blocks can be assembled in countless combinations, customers have great flexibility in purchasing custom computing platforms. In fact, Supermicro claims to offer the broadest product portfolio in the industry.
Earlier this year, Rosenblatt Securities analyst Hans Mosesmann highlighted these advantages in a note to clients, saying: “Super Micro has developed a model that is very, very fast to market. They usually have the broadest product portfolio when a new product comes out from Nvidia or AMD or Intel.”
Supermicro has also developed building blocks for liquid-cooled AI servers and is one of the first companies to ship liquid-cooled racks at scale. This puts Supermicro in a good spot. Liquid cooling can reduce data center energy use by 40%, and Supermicro expects 15% to 30% of data center installations in the next two years to rely on liquid cooling, from less than 1% historically.
Supermicro shares trade at a reasonable valuation compared to Wall Street’s earnings forecast
Here’s the big picture: Businesses want high-efficiency AI servers equipped with the latest chips, especially Nvidia graphics processing units (GPUs), so they’re turning to Supermicro. On the other hand, the company is gaining market share and expanding its leadership.
Really, Bank of America Analysts expect Supermicro to account for 17% of AI server sales by 2026, up from 10% in 2023. Even more, Keybanc analyst Tom Blakely says Supermicro could capture 23% of the market by 2025. He also says the company has “competitive moats it should maintain if not expand” its share in the coming years.
Wall Street analysts expect Supermicro to grow adjusted earnings per share by 59% annually through fiscal 2025 (ends June 2025). This valuation makes the current valuation of 46 times adjusted earnings look very reasonable.
In this context, Supermicro has a PEG ratio — its price-to-earnings ratio divided by projected earnings growth — of roughly 0.78. Using the same methodology, Nvidia currently has a PEG ratio of roughly 1.4, which means the stock is (probably) much more expensive.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, JPMorgan Chase and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.