C3.ai (AI 0.15%) and Super Micro Computer (SMCI -1.19%) both seem poised to profit from the expansion of the artificial intelligence (AI) market. C3.ai develops AI algorithms that can be plugged into an organization's existing software infrastructure to accelerate and automate specific tasks. Super Micro Computer, more commonly known as Supermicro, is a leading producer of dedicated AI servers and server architecture.
However, investors have been much more bullish on Supermicro, which rallied more than 2,000% over the past three years. C3.ai's stock declined more than 50% during the same period, and it's still trading nearly 30% below its IPO price. Let's see if Supermicro will remain the better AI tech play than C3.ai for the foreseeable future.
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Why couldn't C3.ai impress its investors?
C3.ai mainly serves large government, industrial, and energy customers. It generates more than 30% of its annual revenue from a joint venture with the energy giant Baker Hughes, but that deal expires in April 2025. It needs to renew that contract with favorable conditions to keep growing over the next few years.
C3.ai's revenue grew 38% in fiscal 2022 (which ended in April 2022) but only rose 6% in fiscal 2023. Its growth cooled off as it faced tough competition and intense macro headwinds that drove many companies to rein in their software spending. To cope with that pressure, C3.ai rolled out more consumption-based plans, which generated less consistent revenue than its subscriptions. That shift throttled its sales throughout fiscal 2023, but its revenue growth accelerated again throughout fiscal 2024 and rose 16% for the full year. Its rising customer engagement rates repeatedly offset the declining average selling prices for its services as it expanded its consumption-based services.
For fiscal 2025, it expects its revenue to rise in a range 19% to 27% as it gains more federal customers and it rolls out new tools for the generative AI market. That acceleration is promising, but the stock isn't cheap at nearly 10 times this year's sales. It's also unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures, and it's been prioritizing the development of its new generative AI tools over meaningfully narrowing its net losses.
In short, C3.ai's customer concentration issues, lack of profits, and high valuation all likely kept the bulls away as other AI stocks soared over the past year. High interest rates are also casting an unflattering light on C3.ai's biggest weaknesses.
Why can't the bulls get enough of Supermicro?
Supermicro holds a smaller share of the server market than Dell Technologies and Hewlett Packard Enterprise, but it mainly produces high-performance liquid-cooled servers that can process complex tasks more efficiently than traditional servers.
That focus made it an ideal partner for Nvidia, which grants Supermicro access to its top-tier data center GPUs before many of its larger competitors. Supermicro then carved out its own niche by selling dedicated AI servers.
Supermicro's revenue and earnings rose 37% and 115%, respectively, in fiscal 2023 (which ended last June) as the market's insatiable demand for new AI servers quickly outstripped its available supply. As the AI market continues to expand, analysts expect its revenue and earnings to soar 110% and 102%, respectively, in fiscal 2024.
Supermicro now generates more than half of its revenue from AI servers, and that percentage should continue to rise. Bank of America expects Supermicro's share of the dedicated AI server market to climb from 10% to 17% within the next three years as the overall market expands 150%.
In other words, Supermicro could still have plenty of room to grow before its business matures. However, investors should be aware that Dell, HPE, and other companies are also rolling out new dedicated AI servers to keep pace with Supermicro, and it will likely face pricing pressure and tough year-over-year comparisons over the next few years. But for now, Supermicro's stock still looks surprisingly cheap relative to its growth potential at 22 times forward earnings and 2 times this year's sales.
The better buy: Supermicro
It's easy to see why the bulls love Supermicro more than C3.ai: It's growing faster, it faces fewer competitors, it doesn't have customer concentration issues, and its stock is cheaper. It also represents a more direct way to profit from the growth of the AI market. Those core strengths will continue to make Supermicro a better buy than C3.ai.
