Not a lot of stocks outperformed Nvidia (NVDA +0.29%) in 2023. In fact, the artificial intelligence (AI) chip superstar was the best-performing stock on the S&P 500 index.
Nvidia shares jumped 239% last year as the company delivered blowout results thanks to skyrocketing demand for its GPUs and accelerators, which are crucial components for the infrastructure that makes AI models like ChatGPT.
However, Nvidia wasn't the top performer in the entire stock market. One of the handful of companies that beat it was a little-known AI stock called Super Micro Computer (SMCI +2.71%). Here's how the two stocks did last year.
Not only did Super Micro Computer, commonly known as Supermicro, beat Nvidia, but the stock is already up 67% in 2024, meaning it's gained nearly 500% since the end of 2022.
What is this under-the-radar stock that's soaring in the AI boom? Let's take a closer look at Super Micro Computer and whether it's a smart buy today.
Image source: Getty Images.
What is Super Micro Computer?
It's not a coincidence that Supermicro stock delivered results similar to Nvidia last year. The company has a lot in common with the AI chip kingpin.
Super Micro Computer makes high-performance and high-efficiency server and storage systems that are especially useful for AI applications.
As Supermicro explains it, AI workloads typically require expedited access to storage, which has driven demand for GPU-based servers. Supermicro's server systems run on Nvidia GPUs and help maximize throughput, eliminate bottlenecks, and minimize latency. The accelerated IO (input/output) of those systems can improve performance by 20% to 100% for intensive workloads.
That technology and its utility in running AI models is starting to drive significant growth at Supermicro.
Much like Nvidia did a few quarters ago, Supermicro just reported preliminary results for its fiscal second quarter that were much better than its forecast back in November. Supermicro reported revenue of $3.6 billion to $3.65 billion, compared to its earlier guidance of $2.7 billion to $2.9 billion. On the bottom line, it posted adjusted earnings per share of $5.40 to $5.55, which was ahead of its prior forecast of $4.40 to $4.88.
Supermicro didn't offer much of an explanation for the soaring growth, only saying that it had strong market and end customer demand. Investors will likely learn more when Supermicro reports its complete second-quarter earnings report after hours on Monday.
NASDAQ: SMCI
Key Data Points
Nvidia blazed the trail. Can Supermicro follow it?
Supermicro's update was reminiscent of Nvidia's hockey-stick-like growth last year as its revenue suddenly tripled, greatly exceeding Wall Street's expectations.
Supermicro appears to be on a similar path given the dramatic growth in the stock, but there's an important difference between the two companies. Supermicro operates with narrow gross margins. In the first quarter, they were just 16.7% and actually fell from the year before.
Typically, a company with low gross margins does not have pricing power, or it's competing on cost. That's much different from Nvidia, which has been able to raise prices on its AI chips because there's a shortage of them and its competitors can't match its performance, at least not yet.
Both stocks also trade at reasonable valuations. In fact, Supermicro is trading at a price-to-earnings ratio of 34, including its second-quarter result. Hardware is cyclical, and the fact that SuperMicro and Nvidia have relatively low P/E ratios for their growth rates shows that the market is skeptical that the current boom will last. Unlike software, hardware isn't recurring revenue, and semiconductor companies tend to see revenue fall in down cycles.
However, the AI boom still appears to be just getting started as hyperscalers like Oracle are building data centers as fast as they can, and the hardware needed to run them is likely to be in high demand for the foreseeable future.
There's still a lot of uncertainty in the evolving AI market, which means that Supermicro stock carries risk, but with the updated guidance, its similarities to Nvidia, and unprecedented demand for AI hardware, the upside potential clearly outweighs the downside risk.
