You've probably heard about artificial intelligence (AI) at some point this year and how investors should include stocks with AI connections in their portfolios. That has some merit, but be careful chasing the stocks everyone is already talking about. There is a good chance that the stock everyone loves will disappoint you. It's very hard to be above average when you're doing what everyone else is.
Enter Super Micro Computer (SMCI 8.89%). The stock is less front-facing to the public when it comes to AI potential than Nvidia (NVDA 6.18%) or Palantir (PLTR 3.73%), but its growth prospects and modest valuation make it an appealing stock idea worth considering. Here is why.
Behind the scenes
AI is seemingly everywhere today, but ironically, Super Micro Computer has been around since the early 1990s. The company specializes in designing and building large-scale computing systems. More specifically, massive data centers that handle cloud work and other highly demanding applications.
Think about it. Most corporations aren't in the computing business. They wouldn't know how to design, pick out, and assemble the many components to build a massive computer system, know how to get it working, make it efficient, etc. Hiring an expert who can create and sell you a turn-key solution is the wiser path.
SMCI Revenue (TTM) data by YCharts
Super Micro Computer has been in business for a long time. But today the company's services are in high demand because of a simultaneous need for enterprises to migrate to the cloud and invest in new technologies like AI to stay competitive in their field. Growth has accelerated, doubling revenue over the past few years.
Bright growth outlook at a modest price
Wall Street has started showing Super Micro Computer stock more respect. Shares are up an impressive 200% this year. But this could be from a rising tide (AI hype) lifting all boats more than investors piling too heavily into a famous name.
Consider names like Nvidia and Palantir below. You can see that each stock is commanding a significant premium (higher P/E ratio) to Super Micro Computer. Yes, they also have higher expected earnings growth rates, but you can compare apples to apples using the PEG ratio.
Each stock's PEG ratio is as follows:
- Super Micro Computer: 0.6
- Palantir: 1.0
- Nvidia: 0.9
SMCI EPS LT Growth Estimates data by YCharts
Super Micro Computer offers the best value when considering how much you pay for each company's expected future earnings growth. And it's not like Super Micro Computer is a fundamentally poor business; the company generates an impressive 29% return on invested capital, signaling that it earns a strong return on each dollar it deploys. That means creating value for shareholders over time.
Buy Super Micro Computer for the long term
Any stock is subject to short-term volatility, especially after the share price moves so much in under one year. Still, Super Micro Computer has the makings of a long-term winner. AI spending accelerated this year (look at Nvidia's results). Super Micro Computer's management noted that it is growing five times faster than its industry over the past 12 months.
Is that a coincidence? Or are corporations decidedly choosing Super Micro Computer to build out their computing investments? Experts believe the shift toward AI is just beginning, which could mean years of upcoming investment opportunities and growth for Super Micro Computer.
Investors should always approach a stock with a carefully thought-out plan, but it seems clear that Super Micro Computer's stock has yet to price in its bright future fully.
