Super Micro Computer (SMCI 2.88%) and Nvidia (NVDA -0.87%) have turned out to be superb investments over the past year thanks to the artificial intelligence (AI)-fueled demand for their products, which has led to a sharp jump in their revenue and earnings.
While shares of Nvidia have gained more than 234% in the past year, Super Micro Computer stock has delivered an even more stunning gain of 855%. Both companies are capitalizing on the booming demand for AI servers although in different ways. Nvidia dominates the market for AI GPUs (graphics processing units) with an estimated share of more than 95%.
Super Micro Computer, on the other hand, makes modular server solutions that are used for mounting AI chips from the likes of Nvidia and other prominent chipmakers. One might argue that Super Micro and Nvidia aren't exactly comparable, but investors should note that both companies are riding on the same catalyst.
Moreover, Super Micro has turned out to be the go-to supplier of AI server solutions for data center operators and cloud computing providers. But can it become a dominant force in AI servers like Nvidia is dominating the market for AI chips? Let's find out.
Impressive growth, becoming a bigger player
In the trailing 12 months ended Dec. 31, 2023, Super Micro generated revenue of $9.25 billion. Management pointed out on the January earnings conference call that it gets more than half of its top line from selling server solutions related to AI GPUs. So selling AI server solutions represented at least $4.6 billion in revenue. Based on Foxconn's estimate that the AI server market was worth $30 billion last year, it can be assumed that Super Micro controlled just over 15% of this market.
Foxconn predicts that the AI server market could generate $150 billion in revenue in 2027. That would translate into a compound annual growth rate (CAGR) of 49%. It is worth noting that Super Micro's revenue is growing at a much faster pace than the estimated growth of the AI server market. Its fiscal Q2 revenue more than doubled on a year-over-year basis to $3.66 billion.
For the full fiscal year, Super Micro is estimating revenue of $14.3 billion to $14.7 billion. The midpoint of that range suggests that the company's revenue will more than double from fiscal 2023's figure of $7.1 billion. So Super Micro seems on track to corner a bigger share of the AI server market.
Meanwhile, Super Micro has been laser-focused on enhancing its production capacity so that it can meet the fast-growing AI server demand. The company points out that its production expansion moves now allow it to support an annual revenue capacity of $25 billion.
That figure looks set to move higher since the company recently decided to raise additional capital through a common stock offering. Though the move would dilute existing shareholders, Super Micro's plan to use that money to enhance its manufacturing capacity would allow it to corner a bigger share of the AI server market.
But can it become the next Nvidia?
Not surprisingly, the stock was upgraded by multiple Wall Street firms recently, which believe that its market share gains are here to stay. Analysts are expecting Super Micro's earnings to increase at an impressive pace over the next five years, outpacing the growth that Nvidia is predicted to deliver.
Consensus estimates suggest that Super Micro's earnings could increase at a 48% CAGR over the next five years. That's higher than the 38% annual earnings growth that Nvidia is expected to deliver over the same period. Moreover, Super Micro stock has already been delivering much stronger gains when compared to Nvidia. Even then, the stock remains attractively valued.
Super Micro and Nvidia are not very far from each other when it comes to their earnings multiples, be it trailing or forward. This can be seen in the chart below.
SMCI PE Ratio data by YCharts
What's more, Super Micro's sales multiple of 5.6 is significantly cheaper than Nvidia's reading of nearly 37. So if the market decides to reward Super Micro Computer with a higher price-to-sales ratio thanks to the eye-popping growth that it has been delivering, it could continue to outperform Nvidia on the market in the future as well.
That's why investors who have missed Super Micro's surge so far can still consider buying this stock, as its market share gains in AI servers point toward more stock price upside.
