Artificial intelligence (AI) has powered Nvidia (NVDA 1.25%) shares to new highs this year, with terrific gains of 220%, and sent the semiconductor specialist's valuation well past the $1 trillion milestone. However, another stock has delivered even stronger gains this year thanks to AI.
Super Micro Computer (SMCI 1.17%) may not be nearly as famous as Nvidia, but it has delivered a stellar performance in the market with gains of 229% in 2023. Let's look at why Super Micro stock has surged big time and check if it can deliver stronger gains than Nvidia in 2024.
NASDAQ: SMCI
Key Data Points
Booming sales of AI servers have supercharged Super Micro
The growing adoption of AI applications has created the need for a new category of servers equipped with powerful GPUs (graphics processing units) and faster memory. These AI servers are faster than traditional data centers and enterprise servers since they carry a massive amount of computing power, which is essential for training large language models (LLMs) and deploying generative AI applications such as ChatGPT.
However, these AI servers also generate a huge amount of heat and consume more electricity because of their powerful specs. According to Citigroup, GPU performance in AI servers can be constrained by improper heat dissipation and power consumption.
As a result, electrical and cooling systems form a key part of a data center's cost structure. While spending on cooling systems may account for 15% of a data center's cost, electrical systems reportedly make up for 40% of the cost base.
This explains why demand for Super Micro's modular AI server rack scale solutions is increasing rapidly. A server rack is used by data center operators to store components such as routers, switches, and other equipment to optimize equipment functioning and also to maintain proper airflow for keeping the systems cool.
Super Micro claims that its plug-and-play server racks allow customers to quickly deploy AI servers while reducing power costs and offering liquid cooling solutions. The company currently has a capacity of producing 5,000 racks a month, and the good part is that all its supply seems to be sold out. In the first quarter of fiscal 2024 (which ended on Sept. 30), Super Micro's revenue came in at $2.1 billion, up 14% year over year.
Management pointed out that the quarter was affected by "GPU and key component shortages during our traditionally soft September quarter." However, the company's second-quarter outlook points toward even stronger growth. It expects fiscal second-quarter revenue of $2.8 billion at the midpoint of its guidance range. That would be a 55% increase from the prior year.
The good part is that Super Micro sees robust demand for its end-to-end liquid-cooled data center solutions thanks to the growing adoption of AI. The company said on its Q1 2024 earnings call that it can provide "a complete rack scale liquid-cooling solution" to customers with a "minimum lead time of about two weeks." With the liquid-cooled data center market set to grow at an annual rate of 25% over the next five years, Super Micro seems to be sitting on a secular growth opportunity.
The company is anticipating that its fiscal 2024 revenue will hit $10.5 billion, up 48% over 2023. Super Micro is hopeful it will hit its $20 billion annual revenue target over the next couple of fiscal years by increasing its rack production capacity. Super Micro is set to bring online a new facility in Malaysia in the second half of fiscal 2024, which is expected to double its production capacity and could support $30 billion in annual revenue.
How much upside can investors expect in 2024?
Super Micro expects $10.5 billion in revenue in the current fiscal year at the midpoint of its guidance range. For fiscal 2025, analysts are anticipating $13.4 billion in revenue from the company.
Assuming its revenue in the first six months of fiscal 2025 (which will end in December 2024) stands at $6.7 billion (which is half of what analysts are anticipating for the full year), and Super Micro generates $5.6 billion in revenue in the second half of fiscal 2024 (arrived at by deducting its fiscal Q1 revenue and fiscal Q2 forecast from the full-year revenue forecast of $10.5 billion), its calendar 2024 revenue could stand at $12.3 billion.
Multiplying that with the S&P 500 index's sales multiple of 2.5 points toward a market capitalization of almost $31 billion after a year, that's more than double the current market cap, indicating that Super Micro stock may be set up for terrific upside next year. Nvidia, meanwhile, carries a 12-month median price target of $650, according to 47 analysts covering the stock, which would be a 39% jump from current levels.
All this means there is a good chance that Super Micro Computer may outpace Nvidia stock in 2024 as well. Given that Super Micro is trading at just 2 times sales even after the eye-popping gains it has delivered this year, investors would do well to buy this AI stock for impressive gains in the new year and beyond.
