Nvidia (NVDA 0.80%) has been a very successful stock pick over the past few years, but some are worried that it may be heading for some bumpy times. However, there's a strong trend toward more data center buildouts, as we're a long way from having artificial intelligence (AI) deployed to the scale that many people envision it can reach.
That's where Super Micro Computer (SMCI 3.57%) comes in. It makes data center components that house and cool computing devices within a data center. This is a critical part of data center infrastructure, but does it make Supermicro (as the company often calls itself) a better pick than Nvidia?
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Nvidia's profit margins are far superior
Nvidia rose to the top of the computing market through its best-in-class graphics processing units (GPUs), which are used to process multiple calculations in parallel. They can also be connected in clusters to amplify this effect, so they have been top picks in data centers focused on AI processing.
NASDAQ: NVDA
Key Data Points
GPUs create a ton of heat, and managing that heat load effectively is critical for optimal performance and the service life of the GPU. Supermicro offers a few solutions, but the most intriguing option is its direct liquid cooling (DLC) method, which uses liquid to cool computing devices instead of air. By using liquid, Supermicro doesn't need to account for as much airflow within a data center, so it can pack more computing devices into a smaller area. The company estimates this technique offers a 40% energy savings and 80% space savings, which makes building these expensive data centers far cheaper.
While Nvidia's superior product offering distinguishes it from its competitors, Supermicro doesn't have the same degree of separation. Some of Supermicro's competitors also offer liquid cooling options, so they don't have Nvidia's pricing power. This shows up in the difference between each company's gross margin.
NVDA Gross Profit Margin data by YCharts
Nvidia can charge a massive premium for its product because it knows that it has a superior offering. Supermicro cannot, as its clients could easily go to another competitor within the space.
This is one strike against Supermicro, but there are other reasons Supermicro may be a smart stock to consider.
Supermicro's stock price surged in recent days
Recently, Supermicro announced a $20 billion partnership with DataVolt, a Saudi Arabian data center company. This caused the stock to rise rapidly, gaining around 20% since that announcement and 43% in the last month.
This is a big deal for Supermicro's stock, but after the positive reaction to the news, it is far more expensive than it was just a few weeks ago.
SMCI PE Ratio (Forward) data by YCharts
At 22 times forward earnings, Super Micro Computer now trades at the same valuation as the S&P 500.
Despite the deal, Supermicro isn't expected to grow as fast as Nvidia. For fiscal year 2025, which ends June 30, Supermicro's revenue is expected to rise 48%, while Nvidia's is expected to increase at a 53% clip for fiscal year 2026, which ends in January 2026. Those are still two incredibly fast growth rates, and no investors should be disappointed in either rate.
So, with the two growing at the same rate and Supermicro's stock being cheaper than Nvidia's, does that make it a buy over Nvidia? I'd say no. The biggest issue for me is Supermicro's falling gross margin, which rapidly declined over the past few quarters. There isn't a massive differentiating factor between Supermicro's product and its competitors, so it could easily be disrupted if someone comes out with an innovative technique or technology.
Nvidia has solidified its spot in nearly all data centers built around the globe, and its technology is a differentiating factor between it and its competitors, which is why I think Nvidia is a better stock pick between the two.
