Nvidia emerged as a stock market favorite in 2023 with the ever-surging demand for its artificial intelligence (AI) chips across the world. Shares of this high-performance chip specialist are currently up by 197% so far this year, despite some weakness in the last few weeks.
Nvidia's prowess in accelerated computing has made it a top-notch investment amid the current AI frenzy. But with the company trading at 34 times sales and 107 times trailing earnings, investors will have to pay a premium to participate in this growth story if they do not already own the stock.
Instead, they can choose other AI stocks, such as Super Micro Computer (SMCI 0.58%) and Intuitive Surgical (ISRG 1.62%), which are less expensive yet have significant long-term growth potential. Here's why they can be attractive picks now.
1. Super Micro Computer
Shares of Super Micro Computer have surged by over 242% so far this year. Once considered to be just a commodity server provider, Super Micro Computer has now pivoted to offering a complete IT system that includes servers, storage, AI, software, networking, cooling, and other related services.
NASDAQ: SMCI
Key Data Points
Super Micro Computer uses the "building block" approach (modular and open-architecture) to design highly customizable server and storage systems, optimizing individual components and parts instead of mass-producing servers. This makes a client's server infrastructure highly scalable, adaptable to changing technological trends, and less costly to replace by swapping out only a single component instead of replacing the entire system.
Super Micro's focus on cost optimization and advanced energy efficiency and cooling technologies has also made its solutions a preferred option for power-hungry and costly AI applications. The company's partnerships with semiconductor leaders such as Advanced Micro Devices, Intel, and Nvidia give it early access to next-generation chips, keeping it at the forefront of server technology. Hence, Super Micro seems well positioned to benefit significantly from the surge in demand for AI servers, a market expected to have a dramatic 50% compound annual growth rate (CAGR), going from $30 billion in 2023 to $150 billion in 2027.
Super Micro Computer posted an impressive performance in fiscal 2023 (ending June 30). Revenue was up by 37% year over year to $7.1 billion, while adjusted earnings per share soared by over 114% to $11.40. The company is now guiding for revenue of $9.5 billion to $10.5 billion for fiscal 2024, implying a healthy year-over-year jump of 33% to 47%.
Despite the impressive share price gains, Super Micro Computer still trades at only 2.3 times sales, far cheaper than Nvidia. With the company expecting annual sales of around $20 billion in the next two years, share prices can see dramatic growth even if there is no increase in valuation. Hence, considering its cheap valuation and robust growth prospects driven by surging demand for AI infrastructure, investors can consider buying this stock now.
2. Intuitive Surgical
Shares of Intuitive Surgical, a global leader in minimally invasive robotic-assisted surgery, are currently up by nearly 8.5% so far this year. Although the stock saw a temporary decline during the pandemic due to a drop in elective procedures, this headwind seems to have mostly faded by now.
NASDAQ: ISRG
Key Data Points
Its state-of-the-art da Vinci system provides highly magnified 3D high-definition views enabling surgeons to operate precisely using minuscule, mechanically-assisted instruments. The system uses AI and machine learning to analyze data from prior procedures and generate intelligence that is used to enhance pre-surgical planning and decision-making during operations.
Recently, the company launched phase 1 of Case Insights, an AI tool that will work with da Vinci and hospital data to derive surgical insights. Intuitive is also using AI for various other purposes, including medical education and selecting ideal surgical candidates.
Intuitive Surgical placed 331 da Vinci systems in the second quarter (ending June 30) and now has an installed base of over 8,000 systems. The company's razor-and-blade business model has enabled it to build a steady stream of recurring revenue from the sale of disposable surgical instruments and accessories, which now accounts for nearly 85% of total sales.
In the second quarter, instruments and accessories revenue rose by 20% year over year to $1.08 billion, driven by rapid expansion in the installed base and a surge in procedure volume.
The lucrative business model and high revenue visibility have played a pivotal role in the consistent improvement of Intuitive Surgical's key financial metrics. In the second quarter, the revenue and adjusted earnings beat consensus estimates. The company also had cash and investments of $7.1 billion at the end of the second quarter, which can help fund its ambitions to innovate and expand into new products and markets.
Intuitive Surgical is currently trading at 73.3 times trailing-12-month earnings, much higher than the median valuation in the medical devices and instruments industry of 28.08. While the stock is definitely not cheap, its premium valuation seems justified, thanks to Intuitive's unparalleled dominance in the rapidly expanding robotic surgery market (estimated to grow from $5.7 billion in 2023 to $18.2 billion in 2030). Given this backdrop, investors can consider picking up a small position in this AI stock now.
