Shares of AI-related technology stocks did phenomenally well in 2023, even those not named Nvidia (NVDA 6.18%).
In fact, three "Nvidia-adjacent" companies, such as AI accelerator competitor Advanced Micro Devices (AMD 2.37%), server-maker partner Super Micro Computer (SMCI 8.89%), and big data software platform Palantir (PLTR 3.73%) each had very big years in 2023, rising 127.6%, 246.2%, and 167.4%, respectively, according to data from S&P Global Market Intelligence.
Of note, Super Micro Computer's gain even exceeded Nvidia's 238.9% gain in 2023. Here's how these three did it and what may be in store for these 2023 winners in 2024.
A partner, a competitor, and a user of Nvidia's Hopper AI accelerators
To no one's surprise, the big theme of the past year was artificial intelligence. The debut of OpenAI's ChatGPT chatbot occurred in November 2022; six months later, Nvidia posted explosive revenue growth in May 2023, indicating a new arms race was underway for AI supremacy.
That event propelled several participating stocks higher, and the momentum continued in fits and starts throughout the year.
Super Micro Computer is a close partner of Nvidia, dating back to both companies' founding in 1993. Under founder and CEO Charles Liang, Super Micro has carved out a profitable niche for itself in the server industry, which investors tend to think of as commoditized.
But Super Micro has a unique approach, forming its servers out of building blocks, breaking each part of the server into individual components that can be arranged and customized in myriad ways. Furthermore, Super Micro has been at the forefront of energy-efficient server design for years. While not many cared about energy efficiency in decades past, AI chips are incredibly energy-hungry and generate a lot of heat. So, energy efficiency can translate into big dollars for today's AI data center operators.
The result is that Super Micro has seen a deluge of AI-related orders. Revenue grew 37% in fiscal 2023, which ended in June. And based on the midpoint of management's guidance for fiscal 2024, the company should grow another 40%-plus this year.
Super Micro came into the year at quite a low valuation of just around 8 times earnings. Now, with AI-fueled growth in sight, it's around 32.
Image source: Getty Images.
As Nvidia was exploding higher, investors soon came to wonder who might challenge its AI supremacy in the future. Eventually, they came around to believing in AMD, which also came into the year at a relatively low point after falling 55% in 2022.
While some rebound was somewhat inevitable, AMD's outsized gains were definitely fueled by AI enthusiasm in the second half of the year. In June, AMD unveiled its MI300 AI accelerator, its answer to Nvidia's H100. The chip has some unique properties, including a 12-part "chiplet" architecture, as opposed to Nvidia's single-die architecture, along with a greater capacity to handle more high-bandwidth memory.
While investors initially had a muted reaction to the June presentation, they certainly felt much better when CEO Lisa Su confirmed the MI300 was shipping in the fourth quarter. On the third-quarter earnings release and conference call on October 31, Su projected $400 million in MI300 revenue for the fourth quarter while projecting more than $2 billion in MI300 revenue in 2024.
While far, far below the levels of revenue generated by Nvidia's H100, the quick ramp from AMD seemed to spur optimism that AMD will be able to carve out a small niche for itself in the AI accelerator market, which Su projects could grow to a stunning $400 billion by 2027.
Finally, Palantir also came into the year after a nasty two-year downturn, having fallen 65% in 2022. So, it was likely due for a bounce as well.
But Palantir surprised analysts by reaching generally accepted accounting principles (GAAP) profitability in 2023, showing off impressive operating leverage that got investors comfortable with its ability to eventually generate significant profits. Of note, Palantir achieved GAAP net income profitability over four straight quarters, qualifying the company to potentially join the S&P 500 index.
Palantir got its start using data and analytics to find and dismantle terror networks for the U.S. government but has since expanded into commercial big data applications across a host of verticals. The company was founded in 2003 and has been a pioneer in data analytics, machine learning, and everything artificial intelligence ever since. So, investors grew more confident that Palantir would be a winner in the AI space as it incorporated generative AI into its software platforms.
Can these stocks repeat in 2024?
It's probably a lot to ask for a repeat performance for these stocks in 2024, but the AI revolution could be a multiyear phenomenon, just like the internet revolution was a multiyear growth story from 1995 to 1999, before the bubble burst in 2000.
Personally, I am more bullish on the hardware side of things for now. As is the case with Palantir and any machine learning, data analytics, or automation software, it's still unclear whether generative AI will help these businesses innovate or if it will potentially commoditize their offerings and lead to more competition.
That's not to say the hardware space isn't competitive -- it is. However, generative AI likely offers much more growth opportunity for hardware suppliers while not adding any more competition than that which already exists. Therefore, I'd expect further gains for Super Micro and AMD as long as they execute as they have been.
