Investors have been waiting decades for a new innovation or trend to come along that could do what the internet did roughly three decades ago for corporate America. After plenty of patience, the artificial intelligence (AI) revolution appears to have answered the call.
The allure of AI is the capacity for software and systems to learn without the need for human intervention. This ability to evolve over time and become more proficient at assigned tasks, if not learn new skills altogether, gives the technology a limitless long-term ceiling.
Image source: Getty Images.
In a span of less than 18 months, AI euphoria lifted Nvidia's (NVDA +2.67%) market cap by more than $3 trillion and necessitated a historic 10-for-1 stock split. But following such a monstrous run-up in Nvidia, some Wall Street analysts have turned their attention to other hypergrowth AI stocks that, in their view, offer up to 243% upside.
Headwinds are mounting for Wall Street's AI darling
Though you'll find no shortage of Wall Street analysts who still see the potential for upside in Wall Street's AI darling, there's no denying that headwinds are beginning to mount for Nvidia.
Historic precedent is easily the biggest red flag. For 30 years, there hasn't been a next-big-thing innovation or trend that's avoided an early stage bubble. This is to say that investors commonly overestimate the uptake and utility of new technologies. The fact that most businesses currently lack a clear plan as to how they'll use AI to grow their sales and increase their profits is a testament that artificial intelligence is likely in the next in a long line of early stage bubbles.
NASDAQ: NVDA
Key Data Points
Beyond history, it's impossible to ignore the external and internal competitive pressure Nvidia will have to contend with. Despite controlling an estimated 98% of graphics processing unit (GPU) market share for data centers in 2022 and 2023, Nvidia's piece of the pie is liable to shrink as new AI-GPUs enter the arena.
Moreover, its four largest customers by net sales, which are all members of the "Magnificent Seven," are developing AI chips to use in their data centers. Even if Nvidia's AI-GPUs maintain their computing advantages, which is entirely likely, these four top customers are going to use their in-house chips as complements to Nvidia's hardware. This will reduce future opportunities for Nvidia to win valuable data center "real estate" from America's most-influential businesses.
Lastly, Nvidia's adjusted gross margin declined in the fiscal second quarter (ended July 28) for the first time in two years. AI-GPU scarcity has been fueling the company's pricing power and its rapid expansion of gross margin. But as this scarcity wanes, Nvidia's pricing power, and its gross margin, should fall.
Instead of focusing on Nvidia, select Wall Street analysts see more prolific upside in the following two high-growth AI stocks.
Image source: Getty Images.
Snowflake: Implied upside of 93%
The first supercharged AI stock that at least one Wall Street analyst sees outpacing Nvidia is cloud-based data warehouse goliath Snowflake (SNOW +0.69%). Analyst Kash Rangan of Goldman Sachs believes Snowflake can reach $220 per share, which would work out to a gain of roughly 93%, based on where it ended August.
Rangan added Snowflake to Goldman's "Conviction List" in July, with the belief that the company is ideally positioned for the next phases of the AI revolution -- i.e., the stage(s) where platforms and AI applications benefit most.
The lure for Snowflake has long been its superior growth rate and well-defined competitive advantages. Its infrastructure is layered atop the most-popular cloud infrastructure service platforms to eliminate data-sharing constraints for its clients.
Furthermore, it's shunned the traditional subscription model in favor of a pay-as-you-go platform that charges clients based on how much data they store and how many Snowflake Compute Credits they use. There's little question that this cost transparency is resonating with its customers.
NYSE: SNOW
Key Data Points
Unfortunately, Snowflake's once jaw-dropping growth rate has cooled considerably. Year-over-year organic growth rates that surpassed 70% as recently as the second quarter of fiscal 2023 (ended July 31, 2022) are now below 30%. While the company has an impressive $5.2 billion backlog at its disposal, and it's continuing to add bigger fish to its client pool, the valuation premium it once commanded no longer makes sense.
In order for Snowflake to come anywhere close to Rangan's price target, it's going to need to meaningfully improve its adjusted profitability and stabilize its year-over-year sales growth in the 25% range.
Super Micro Computer: Implied upside of 243%
A second hypergrowth artificial intelligence stock with tantalizing upside, based on the forecast of one Wall Street analyst, is rack server and storage solutions specialist Super Micro Computer (SMCI 1.77%). Loop Capital's Ananda Baruah sees Super Micro's shares eventually hitting $1,500, which would imply a more-than-tripling from where they closed on Aug. 30.
Loop's price target on Super Micro is based on the company being well-positioned in the AI server market. Businesses wanting to gain a first-mover advantage in the AI space will be compelled to spend aggressively on the infrastructure needed to make that happen.
NASDAQ: SMCI
Key Data Points
We've certainly seen evidence that demand for Super Micro's servers is incredibly strong. Following net sales growth of 110% in fiscal 2024 (ended June 30), the midpoint of the company's fiscal 2025 sales guidance ($28 billion) implies revenue growth of 87% in the current year. Despite Wall Street's consensus calling for north of $45 in earnings per share in fiscal 2026 (ended June 30, 2026), Super Micro is currently valued at a forward price-to-earnings (P/E) ratio of less than 10.
Things seem almost too good to be true -- and they just might be.
Last week, noted short-seller Hindenburg Research released a report that alleges, among other things, evidence of accounting manipulation at Super Micro Computer. This short-seller report was followed days later by Super Micro delaying the filing of its annual report. While this isn't an admission of wrongdoing, nor does it validate Hindenburg's findings, it does stir the pot at a sensitive time for the company.
Additionally, Super Micro Computer has failed to live up to lofty growth expectations before. Aggressive sales growth forecasts during the initial cloud-computing boom in the mid-2010s weren't met. Considering what history tells us about next-big-thing innovations and the time they need to mature, skepticism appears well warranted with Super Micro, in spite of its historically cheap valuation.
