In the wake of the worst market performance in more than a decade, things are looking up. After shedding one-third of its value last year, the Nasdaq Composite has gained roughly 37% this year, and there could be more to come.
There's a strong argument to be made that what kicked the market into overdrive this year is recent developments in the field of artificial intelligence (AI). The debut of ChatGPT late last year illustrated the vast potential for productivity gains for those adopting generative AI. This sparked a mad dash among companies to implement these next-generation algorithms. As a result, the generative AI market is expected to grow to $1.3 trillion over the coming decade, according to estimates provided by Bloomberg Intelligence.
The poster child and principal beneficiary of this trend has been Nvidia, whose graphic processing units (GPUs) have become the gold standard for AI applications. As a result, the stock is up 222% so far this year (as of this writing), driven higher by triple-digit revenue and earnings growth. Despite these rapid gains, some investors are sitting on the sidelines, repelled by the stock's frothy valuation.
Investors might be surprised to learn that one AI stock has actually outperformed Nvidia so far this year, yet remains incredibly cheap by comparison. That's why investors should consider Super Micro Computer (SMCI 3.28%).
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Another 'picks and shovels' play
One of the compelling reasons to buy Nvidia stock is that it won't ultimately matter which generative AI systems come out ahead since many of them will run on Nvidia's cutting-edge processors. Demand has been off the charts for the company's GPUs as cloud computing providers and data centers alike ramp up their capabilities in order to keep up with the stunning demand for AI.
This makes Nvidia a so-called "picks and shovels" play, which harkens back to the gold rush era where investing in the tools (picks and shovels) used to produce the product (gold) could be even more lucrative. In this case, AI is the gold rush, and Nvidia processors are the picks and shovels.
Super Micro Computer, commonly called Supermicro, is another picks and shovels play. The company provides high-end servers, storage solutions, and accelerated computing platforms optimized for high-performance computing (HPC) applications, including data centers, cloud computing, edge computing, and AI. In fact, Supermicro partners with Nvidia to offer servers outfitted with the latest cutting-edge chips and customized for AI applications, which has been a boon to the company.
After generating just 7% year-over-year revenue growth in fiscal 2021 (ended Jun. 30, 2021), sales climbed 46% in fiscal 2022 and 37% in fiscal 2023, fueled by demand for its high-end AI servers. Furthermore, after falling into the red in 2021, adjusted net income surged 129% and 116% in fiscal 2022 and 2023, respectively.
The company expects its growth spurt to continue. CEO Charles Liang said, "We continue to see unprecedented demand for AI and other advanced applications requiring optimized rack-scale solutions. We are in a great position to continue our growth momentum given our record new design wins, customers, and backlog for our best-in-class rack-scale Total AI & IT Solutions."
As a result of the strong and increasing demand for AI, data center operators and cloud providers are racing to update their facilities to meet the compute-intensive needs of AI applications. This secular tailwind will serve Supermicro well in the coming years.
Is Supermicro stock a buy?
Wall Street is solidly behind Super Micro Computer. Of the nine analysts that covered the stock in November, seven rated it a buy, and none recommended selling. The average analyst's price target of roughly $361 suggests potential upside of 32% compared to Thursday's closing price.
However, analysts at Northland recently elevated Supermicro to its "Top Pick" list, while maintaining its outperform (buy) rating and a price target of $450, which represents potential gains for investors of 65%. The firm's research suggests that companies offering GPU-as-a-service are adopting water-cooled servers -- like Supermicro's -- faster than originally expected. The firm expects these providers to steal market share from incumbents, representing additional opportunity for Supermicro to be "an AI share gainer."
Data by YCharts
There's more. Investors might be surprised to learn that Supermicro stock has outperformed Nvidia so far this year, as the stocks are up 225% and 220%, respectively. Furthermore, Supermicro has outpaced Nvidia stock over the preceding one-, three-, and five-year periods as well.
To be clear, it's unlikely that Supermicro will grow at the same rate as Nvidia going forward, but it doesn't have to in order to be successful, as evidenced by its soaring profits. Beyond that, there are other reasons that investors who feel they've missed out on Nvidia should buy Supermicro.
Supermicro just raised its fiscal 2024 guidance and is now expecting revenue to grow 47% at the midpoint of its guidance, up from its previous forecast of 40% growth.
The biggest draw, of course, would be the valuation. Supermicro is currently trading for just 2 times sales, making it a steal. For comparison, Nvidia is selling for 26 times sales, though it's growing its revenue at a much faster clip.
For investors who feel they've missed the boat with Nvidia, Supermicro represents a compelling opportunity and is still selling for a song.
