Every big investing theme has winners that rise to the top. Amazon was the champion of e-commerce, and Microsoft was the king of computers. Which companies will dominate artificial intelligence (AI)? It could be too early to tell for sure, but some potential favorites are emerging from the pack.
Snowflake (SNOW 1.28%) and Super Micro Computer (SMCI 2.11%) have become pivotal in the development and growth of artificial intelligence (AI) technology. These stocks have the ingredients to generate lucrative investment returns over the long term and both trade at attractive prices today.
Here is the pitch for why these two AI stocks could help you become a millionaire investor.
1. Snowflake is at the center of artificial intelligence
Data is at the heart of AI. Wall Street has been in a frenzy over Nvidia and the AI chip landscape, but AI is only as good as the data the model is trained on. That's where Snowflake could have a critical role over the coming years. Snowflake is a cloud-based platform where data can be stored, analyzed, and queried. Customers can also access third-party data on Snowflake's marketplace, letting companies efficiently manipulate and enhance their data as needed.
Snowflake grows through two primary engines. First, it works with more customers. The company currently has over 9,400 customers and ended its fiscal year 2024 with a 22% year-over-year increase in customer count. Second, Snowflake bills customers based on computing and storage usage. Since data grows exponentially, most customers will likely use more computing and storage over time. That's a big reason why Snowflake boasts an impressive 131% net revenue retention rate.
Assuming AI is as important as it seems, every company could eventually need AI to compete. There are hundreds of thousands of corporations worldwide, meaning Snowflake is very early in its customer expansion story. Snowflake could conceivably grow revenue at a double-digit rate for years to come. The business also generates robust cash flow; approximately 42% of revenue is now winding up as free cash flow.
Snowflake went public in late 2020, and shares have continually compressed since the market bubble popped months later. Today, Snowflake's valuation is a fraction of what it once was and is currently at its lowest point as a public company:
SNOW EV to Revenues (Forward) data by YCharts
I won't try to call a bottom on the stock, but it's clear that much of its hot air is gone now. Long-term investors who believe in Snowflake's business model should consider the stock a high-potential long-term investment idea that could lift a portfolio over the coming decades.
2. Super Micro Computer provides turn-key AI solutions
Artificial intelligence requires advanced computer systems housed in data centers. But how many companies can build and operate such a system efficiently from the ground up? That's where Super Micro Computer, also doing business as Supermicro, comes in. The company sells turn-key data center systems built on proprietary modular server hardware. Demand for Supermicro's systems has exploded over the past 18 months:
SMCI Revenue (TTM) data by YCharts
The exponential growth has created exponential investment returns. The stock is up over 2,000% over the past three years. Yet, there is a solid argument that the stock isn't expensive today. Shares have come down quite a bit from their 52-week high. Today shares trade at a forward P/E of 33. Management is guiding for 152% year-over-year revenue growth for the fourth quarter of its fiscal year 2024. Meanwhile, analysts believe earnings can grow by over 50% annually for the next three to five years.
Outside data supports this trajectory. According to estimates by Newmark, the demand for U.S. data centers will double between now and 2030. This industrywide growth is a tailwind for Supermicro, and management has stated that it's growing faster than the industry, meaning it's become the go-to for these data center systems, similar to how Nvidia is the go-to for AI chips.
Turning back to Supermicro's valuation, assuming analysts are right about earnings growth moving forward, the stock's current PEG ratio of 0.6 implies that it is a table-pounding bargain for its anticipated growth. Typically, I buy stocks with a PEG ratio under 1.5; anything under 1 is often considered cheap.
That doesn't guarantee Supermicro delivers on its potential, but even coming somewhat close to expectations could produce massive investment returns for long-term investors.
