The past year or so has marked a coming-of-age story for artificial intelligence (AI). Generative AI's ability to generate original content and streamline time-consuming processes represents a potential step change in how business gets done. The opportunity to profit from the productivity gains made possible by these next-generation algorithms has many companies scrambling to determine how best to integrate them into their day-to-day operations.
Despite generating market-beating performances in 2023, some market watchers believe there's more to come for AI stocks. In fact, a pair of Wall Street analysts suggest two still have potential upside of 63% and 70% over the coming year.
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Artificial intelligence buy No. 1: Nvidia -- 63% implied upside
If there is one stock that exemplifies the potential represented by recent advancements in AI, Nvidia (NVDA +2.59%) would certainly be in the running. Its graphics processing units (GPUs) use parallel processing, the ability to process a magnitude of mathematical calculations simultaneously by breaking the data into smaller chunks to make it more manageable. This not only revolutionized gaming but also enabled the evolution of AI.
In the company's fiscal 2024 (ended Jan. 28), Nvidia delivered revenue that grew 126% year over year to roughly $61 billion, while its diluted earnings per share (EPS) soared 586% to $11.93. For its fiscal 2025 first quarter (ends April 30), Nvidia is guiding for record revenue of $24 billion, an increase of 234% year over year. Management left no doubt that the accelerating demand for generative AI was behind the surge.
Despite the stock rising 488% since the start of 2023 (as of this writing), Rosenblatt analyst Hans Mosesmann, the self-professed "most bullish analyst on Nvidia," has a buy rating and a Street-high price target of $1,400 on the stock. That represents potential upside of 63% compared to Monday's closing price. Mosesmann said, "The shift to accelerated compute away from general compute is reaching a tipping point, and a disruptive new app, generative AI, is creating a whole new industry."
The analyst isn't alone in his bullish take. Of the 56 analysts who issued an opinion in March, 52 rated the stock a buy or strong buy, and not one recommended selling. That's amazing, considering Wall Street never agrees on anything.
Nvidia stock is currently selling for 34 times forward earnings. While that's a premium to the multiple of 27 for the S&P 500, the company's triple-digit growth and strong tailwinds suggest it's worthy of a premium.
Artificial intelligence buy No. 2: Super Micro Computer -- 70% implied upside
While Nvidia provides the GPUs necessary to train and run AI systems, Super Micro Computer (SMCI +8.72%), also known as Supermicro, incorporates these state-of-the-art chips and others into high-end servers specially designed to withstand the rigors of AI processing.
The company's focus on energy efficiency is well-documented, as is its building-block architecture. Supermicro offers a variety of free-air, liquid-cooling, and traditional air-cooling technologies, providing AI-centric server solutions for every budget and technology level.
In the company's fiscal 2024 second quarter, Supermicro generated revenue that grew 103% year over year to roughly $3.7 billion, while its adjusted EPS jumped 71% to $5.59. And management believes the company's growth spurt will continue to accelerate. Supermicro is forecasting third-quarter revenue of $3.9 billion and EPS of $5.22 at the midpoint of its guidance, which would represent year-over-year growth of 205% and 220%, respectively.
The stock is up an incredible 975% since the start of 2023, but some believe significant upside remains. Loop Capital analyst Ananda Baruah has a buy rating and a Street-high price target of $1,500 on the stock. That represents potential upside of 70% compared to Tuesday's closing price.
Baruah is increasingly confident in Supermicro's position in the generative AI server space and its leadership in addressing the increasing complexity and scale of the server industry. Furthermore, he believes the company can achieve a revenue run rate of $40 billion by the end of its fiscal 2026. For context, that runs circles around the $7.1 billion it generated in its fiscal 2023 (ended Jun. 30).
The analyst isn't alone in his bullish take. Of the 15 analysts who covered the stock in March, 11 rated it a buy or strong buy, and none recommended selling. Supermicro stock is also attractively priced, currently selling for 3 times forward sales.
