Super Micro Computer (SMCI 7.12%) and Nvidia (NVDA -1.91%) are two of the market's hottest artificial intelligence (AI) stocks. Super Micro Computer, more commonly known as Supermicro, is a leading producer of dedicated AI servers. Nvidia is the world's largest producer of data center GPUs for processing AI tasks.
In 2023, Supermicro's stock rallied 246% as Nvidia's stock rose 239%. And since the start of 2024, Supermicro's stock has risen another 223% as Nvidia's stock has advanced 164%. Both stocks are still riding high on the buying frenzy in AI stocks, but I believe Supermicro will continue to perform Nvidia through the end of the year for three simple reasons.
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1. Superior growth rates
Supermicro's revenue and earnings rose 37% and 115%, respectively, in fiscal 2023 (which ended last June) as its sales of dedicated AI servers surged. Analysts expect its revenue and earnings to grow 110% and 102%, respectively, in fiscal 2024.
By comparison, Nvidia's revenue growth flatlined in fiscal 2023 (which ended in January 2023) as adjusted earnings fell 25%. Its sales of gaming graphics processing units (GPUs) declined as macro headwinds throttled its sales of data center chips and people started to adapt to the challenges introduced by the onset of the Covid-19 pandemic.
But in fiscal 2024, Nvidia's revenue and adjusted earnings surged 126% and 288%, respectively, as the explosive growth of the generative AI market lit a raging fire under its sales of data center GPUs and offset its slower sales of gaming GPUs. Analysts expect its revenue and earnings to grow 98% and 108%, respectively, in fiscal 2025.
Those growth trajectories are similar, but analysts expect Supermicro to grow faster than Nvidia over the next three years. From fiscal 2023 to fiscal 2026, they expect Supermicro's revenue to grow at a compound annual growth rate (CAGR) of 58%. From fiscal 2024 to fiscal 2027, they expect Nvidia's revenue to rise by a CAGR of 44%.
2. A better diversified business with more growth potential
We should take those estimates with a grain of salt, but Supermicro seems to have more room to grow than Nvidia. Supermicro currently only controls about 10% of the dedicated AI server market, but Bank of America expects its share to grow to 17% over the next three years as the entire market expands 150%.
That growth will be supported by its longtime partnership with Nvidia, which grants it access to the chipmaker's high-end data center GPUs before most of its bigger competitors. However, Supermicro has also been developing dedicated AI servers that use Advanced Micro Devices' cheaper data center GPUs. That fledgling partnership could gradually reduce Supermicro's dependence on Nvidia. It would also ensure that its server sales keep rising -- even if AMD gains ground against Nvidia.
Nvidia already controls 88% of the discrete GPU market, according to JPR, and it generated 87% of its revenue from its data center GPUs in its latest quarter. Nvidia's core market of data center GPUs is still expanding, but it probably won't generate as much growth through market share gains as Supermicro in the future.
3. A lower valuation
Supermicro's stock has soared over the past few years, but it's still surprisingly cheap at 25 times forward earnings and 2 times its fiscal 2025 sales. Nvidia looks a lot pricier at 50 times forward earnings and 30 times its fiscal 2025 sales. Supermicro's market cap of $54 billion is also tiny compared to Nvidia's market cap of $3.3 trillion.
Supermicro was only recently revalued from a traditional server maker to a high-growth AI stock, so it could have more room to run before it's considered overvalued. Nvidia, however, is starting to look expensive relative to other chip and AI stocks.
But both stocks are still great long-term AI plays
I believe Supermicro will continue to outperform Nvidia through the end of the year, but both stocks are still great long-term plays for growth-oriented investors. I also think it's still smart to own both Supermicro and Nvidia -- since they operate different business models and focus on different parts of the booming AI market.
