Artificial intelligence (AI) has become the darling of the investment community in 2023. Unsurprisingly, Nvidia (NASDAQ: NVDA) -- with its cutting-edge AI chips and a solid software ecosystem -- has emerged as a hot favorite of Wall Street. Shares of the company have surged by a massive 229% so far this year.
While Nvidia continues to be the undisputed leader in the AI infrastructure space, some investors have started considering the stock to be a tad bit costly. The company trades at a price-to-sales multiple of 26.7, even more than its 5-year average valuation of 22.4.
Against this backdrop, investors can consider picking stakes in other AI stocks with solid growth prospects that are priced reasonably compared to Nvidia. Here's why Tesla (TSLA 0.01%) and Super Micro Computer (SMCI 3.28%) fit the bill.
1. Tesla
Electric vehicle (EV) player Tesla came out with disappointing third-quarter results (ending Sep. 30) marked by slowing top-line growth and shrinking margins. However, CEO Elon Musk has attributed this mainly to the difficult macroeconomic environment wherein higher interest rates have negatively affected consumer discretionary spending and made car purchases difficult. As Tesla worked to increase its sales, it was forced to cut prices multiple times in 2023.
Despite these challenges, CEO Elon Musk remains committed to his goal of making Tesla the world's most valuable company. The company accounts for a nearly 50% share of the U.S. EV market and is currently prioritizing growth over near-term profitability by flooding the market with its cars. By cutting prices now, Tesla has chosen to focus on long-term profitability per vehicle and expects future revenue streams from areas such as autonomy and supercharging.
This move has been possible because the company is a cost leader and is already profiting in a market full of mostly unprofitable EV companies. Furthermore, Tesla's energy storage business saw deployments increasing 90% year over year to four gigawatt hours in the third quarter. Being a record high in terms of deployments, this highlights the increasing strength of Tesla's energy storage business.
Tesla has also made significant progress in its AI initiatives in the third quarter, which includes fully self-driving (FSD) technology; Optimus, a humanoid robot; and Dojo, a supercomputer. The company's vehicles have already driven 0.5 billion miles in a real-world environment with the beta version of the FSD software, thereby giving the company access to a large amount of data for further training and fine-tuning its AI models and chips.
The company also has plans to invest nearly $1 billion in the Dojo supercomputer by next year. The Dojo supercomputer has been designed to process large amounts of video data to further train its AI-driven autonomous driving technologies. Tesla has made rapid inroads in the global humanoid robot market with its Optimus humanoid robot, which is now capable of performing simple tasks.
Tesla is currently trading at a price-to-sales multiple of 8, significantly below its 5-year average multiple of 10.54. Yet, this is undoubtedly an expensive valuation for a car manufacturer grappling with macro and competitive pressures.
However, the premium valuation seems justified if we value the company for its disruptive technological initiatives in the autonomous driving space. Hence, Tesla seems to be an attractive pick now -- especially for patient long-term investors ready to ignore short-term share-price fluctuations.
2. Super Micro Computer
Although not a household name, Super Micro Computer -- a leading provider of high-end server and storage solutions -- is a stock to buy for its long-term growth prospects. With the increasing demand for accelerated computing in generative AI applications, the company's large language model (LLM)-optimized server solutions based on Nvidia's H100 graphics processing units (GPU) have been in high demand.
To diversify its offerings further, the company is also working to introduce new AI-optimized server solutions based on the Nvidia GH200 Grace Hopper Superchip (accelerated central processing unit, or CPU) and Nvidia Grace CPU Superchip, as well as Intel's Gaudi 2 CPU and Advanced Micro Devices' MI250 and MI300 series of chips.
Super Micro Computer caters to more than 1,000 clients across 100 countries. That includes leading data centers, content service providers, and enterprises investing in AI technologies, telecommunications, CPU servers, edge computing, and Internet of Things markets.
The company has differentiated itself in a competitive market by building modular server solutions equipped with liquid cooling solutions to combat high energy costs, power constraints, and thermal challenges associated with new GPU chips. The "building block" architecture also helps clients easily scale or replace specific components, thereby helping control costs.
Super Micro expects 20% of its server deployments at data centers to opt for liquid cooling capabilities. To leverage this opportunity, the company is expanding its production capacity for server solutions with liquid cooling capabilities to reach a target of 5,000 racks (specialized enclosures containing multiple servers, switches, and other IT devices) per month shortly.
Super Micro Computer has been grappling with GPU supply constraints. However, CEO Charles Liang expects the supply of Nvidia's GPUs to improve in the second quarter of fiscal 2024 (ending Dec. 31). The company is trading at a price-to-sales multiple of 2.1, which seems quite reasonable, especially since analysts expect the company's revenues to grow at a solid year-over-year rate of 52.2% in fiscal 2024. In this context, the company presents an attractive investment opportunity for discerning investors.
