Investors are flocking to the artificial intelligence (AI) space to find stocks capable of producing huge gains for their portfolio. Already, many companies have seen their valuations soar. But the biggest days of growth are still ahead. In 2023, the AI market was valued at just $189 billion. By 2032, this market is expected to surpass $4 trillion in value.
Both Nvidia (NVDA +0.04%) and Super Micro Computer Inc. (SMCI +3.06%) are exposed to rising demand for AI. But only one stock should top your buy list for its long-term growth potential.
NASDAQ: NVDA
Key Data Points
Both Nvidia and Super Micro Computer are great AI plays
Make no mistake: Both of these companies are exposed to the rising tide of AI demand. But each has a very different strategy for how they will benefit.
Let's start with Super Micro Computer. In a nutshell, the company sells computer servers specially designed for running AI programs faster and more efficiently. These custom systems are basically one-stop shops, with the required graphics processing units (GPUs) and cooling systems ready to go.
Nvidia, meanwhile, is a supplier to Super Micro Computer. In fact, most of the GPUs Super Micro Computer includes in its systems are Nvidia chips. Think of Super Micro Computer as a direct supplier to AI and data center companies, while Nvidia is a direct supplier to those looking to set up infrastructure to run those businesses.
Thanks to the rapid growth in AI infrastructure spending, both companies are growing quickly, with more than 50% sales growth projected for both businesses this year. But if you want to figure out which business is more valuable, just look at each stock's gross margins and price-to-earnings (P/E) ratios. Nvidia's gross margins are more than six times higher than Super Micro Computer, and its valuation is more than double on a P/E basis.
So, both companies are bonafide AI businesses that are growing quickly. But only one company should top your buy list: Nvidia. As we'll see, its high margins and valuation are well deserved.
NVDA Revenue Growth Estimate for Current Fiscal Year data by YCharts.
This artificial intelligence stock should top your buy list
When it comes to investing in AI stocks, Nvidia should be at the top of your list. What Super Micro Computer does -- essentially aggregating a bunch of third-party components -- is far easier to commoditize than what Nvidia is doing. In a nutshell, it's far easier to replicate Super Micro Computer's business than Nvidia's. Nvidia's AI GPUs are the result of decades of investment, and its CUDA developer suite has proven an immense challenge to compete with, even for well-financed competitors like Intel and Advanced Micro Devices.
Right now, Nvidia controls 70% to 95% of the AI GPU market. Super Micro Computer, meanwhile, controls just 8% of the AI server market. So not only is Nvidia's competitive position more durable, but it's also simply more dominant. All of these result in 75% gross margins, indicating far more pricing power versus Super Micro Computers.
Over time, I expect Super Micro Computer's revenues to expand heavily alongside rising investment for AI infrastructure in general. But due to the commoditized nature of its business, I don't expect gross margins to expand much. Nvidia, meanwhile, can expect to maintain its industry-leading margins for years to come. And shares aren't as expensive as they appear. Yes, Nvidia stock trades at 37 times trailing earnings. But compared to forward earnings -- that is, based on what analysts expect it to earn over the next 12 months -- shares trade at just 25 times forward earnings. That's a fair price for a dominant, profitable business exposed to the biggest growth opportunity in decades.
