Three years ago, OpenAI's ChatGPT introduced generative AI to the world. The technology has since grown to underpin a multi-billion-dollar industry, making chipmaker Nvidia the world's most valuable company.
That said, investors now face the challenges of finding overlooked AI stocks that haven't been caught up in the hype. Let's discuss three reasons why Super Micro Computer (SMCI -0.82%) could be a good long-term pick.
Image source: Getty Images.
1. The AI hardware opportunity looks resilient
As with any hyped-up new technology, there are growing fears that generative AI could be a bubble. This month, the Massachusetts Institute of Technology (MIT) published a report suggesting that only 5% of AI pilot programs deliver rapid revenue acceleration for corporate clients (the other 95% made little impact). But while this report spooked many investors, it's essential to look at the situation in its full context.
When a new technology is introduced, there will be a learning curve as companies and executives learn how to make it work or integrate it into their existing workflows. A similar challenge occurred with the internet in the early 2000s, and generative AI will probably be no exception.
Furthermore, as a hardware supplier, Super Micro operates on the "picks and shovels" side of AI -- selling computer servers and liquid cooling systems for data centers. This niche focus means its business can still succeed, even if the end clients don't profit. The stock allows investors to bet on AI as a whole without trying to pick winners in the increasingly competitive and uncertain software side of the industry.
2. The recent drop could be a good entry point
Super Micro's fourth-quarter earnings were weaker than expected. Revenue came in at $5.76 billion compared to analysts' expectations of $5.89 billion. And management cites operational challenges like tariffs, which could impact its globalized manufacturing supply chain.
That said, the situation isn't all bad. Investors should remember that Super Micro is still growing. In fact, its top line increased 8% compared to the prior year period, which means there is still healthy demand for its products. And while President Donald Trump's global trade war could be a near-term hit to margins, Super Micro aims to limit this challenge by boosting its U.S. manufacturing capabilities in California and potentially expanding to additional, lower-cost states like Mississippi and Texas.
3. Rock-bottom valuations
The final and biggest reason for investors to take a closer look at Super Micro is its low price tag. While the company clearly has some struggles, these are already priced into its valuation. Shares still trade at a whopping 64% discount to their all-time high of $118 reached in March 2024.
A big part of Super Micro's decline had to do with scandals involving delayed financial filings with the Securities and Exchange Commission (SEC) and a now-discredited short-seller report that accused its management of accounting irregularities (in December, an independent special committee found no evidence of misconduct). But while these issues look resolved, some investors are still shying away from the equity.
With a forward price-to-earnings (P/E) multiple of 17, Super Micro trades at a sharp discount to both the S&P 500 average of 23 and other AI hardware alternatives like Nvidia and Advanced Micro Devices, which boast forward P/Es of 40 and 43, respectively. While the company doesn't have the economic moat or growth potential of a specialized chipmaker, it looks like a compelling value-oriented pick in an incredibly hyped up industry.
