Nvidia (NVDA 1.56%) and Super Micro Computer (SMCI 0.50%) have been two of the market's hottest artificial intelligence (AI) stocks. Nvidia is the world's largest producer of high-end data center GPUs for processing machine learning and AI tasks. Super Micro Computer, more commonly known as Supermicro, is a rapidly growing supplier of dedicated AI servers. Most of those systems are powered by Nvidia's GPUs.
Over the past two years, Nvidia's stock surged more than 640% as Supermicro's stock rallied nearly 550%. Both stocks soared as the rapid expansion of the generative AI market drove more companies to upgrade their data centers with new AI chips and servers. But should investors chase either of these high-flying AI stocks right now?
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Nvidia is still firing on all cylinders
Nvidia once generated most of its revenue from gaming GPUs for PCs. But the rapid expansion of the AI market turned its data center unit, which accounted for 87% of its top line in its latest quarter, into its largest and fastest-growing business.
That's why Nvidia's revenue surged 126% in fiscal 2024, which ended in January 2024, and 171% year over year in the first half of fiscal 2025. Analysts expect its revenue and adjusted earnings per share (EPS) to grow 123% and 137%, respectively, for the full year.
NASDAQ: NVDA
Key Data Points
Those growth rates are incredible, but Nvidia still faces some unpredictable challenges. It controlled 98% of the data center GPU market last year, according to TechInsights, but it faces stiff competition from AMD's cheaper GPUs. Nvidia has also been struggling to ramp up its production of its latest Blackwell GPUs, and several of its top AI customers -- including Microsoft, OpenAI, and Alphabet's Google -- have been developing their own first-party AI accelerator chips.
Nvidia's red-hot data center chip sales are also gradually cooling off. Its 16% sequential sales growth in the second quarter of fiscal 2025 actually marked a deceleration from its 23% growth in the first quarter and 27% growth in the fourth quarter of fiscal 2024. Its yield issues with Blackwell also reduced its gross margin sequentially in the second quarter.
Analysts expect Nvidia's revenue and adjusted EPS to both grow 41% in fiscal 2026. Its stock doesn't look that pricey at 44 times forward earnings, but it might shed its premium valuation if companies start to scrutinize and rein in their AI spending.
Supermicro faces some major challenges
Supermicro is an underdog in the server market, but it carved out a niche by producing high-performance liquid-cooled servers. That made it an ideal partner for Nvidia, which provided it with a steady supply of GPUs for its high-end AI servers.
Supermicro's revenue rose 37% in fiscal 2023, which ended last June, and surged 110% in fiscal 2024. Its soaring sales of AI servers, which now account for over half of its top line, offset its slower sales of traditional servers. Bank of America expects the company to expand its share of the AI server market from 10% to 17% over the next three years.
NASDAQ: SMCI
Key Data Points
But in the fourth quarter of fiscal 2024, Supermicro's gross margin shrank sequentially and year over year as it grappled with supply chain issues, ramped up its spending on new liquid-cooling technologies, and faced more pricing pressure from Dell Technologies and Hewlett-Packard Enterprise in the AI server market.
On Aug. 27, prolific short seller Hindenburg Research accused Supermicro of stuffing its sales channels with partial orders of defective products and inflating its revenues. It also said Supermicro hadn't resolved all of the accounting issues that previously caused its stock to be delisted from the Nasdaq in 2018. A day later, Supermicro postponed its 10-K filing for fiscal 2024 and said it needed "additional time" to assess its "internal controls over financial reporting."
Analysts still expect Supermicro's revenue and earnings to grow 90% and 58%, respectively, in fiscal 2025 as it ramps up its shipments of AI servers. For fiscal 2026, they expect its revenue and earnings to rise 19% and 30%, respectively. Those growth rates seem impressive for a stock that trades at just 13 times forward earnings, but its recent problems could drive away the bulls and compress its valuations for the foreseeable future.
The better buy: Nvidia
Nvidia remains the linchpin of the booming AI market, and its market dominance still gives it plenty of pricing power. We can't say the same about Supermicro, which is a lot smaller than Dell and HPE. Supermicro's delayed 10-K filing could also contain some nasty surprises that provide more fuel for Hindenburg's bearish thesis against the company. I once thought Supermicro had a shot at outperforming Nvidia this year, but its shrinking gross margin, Hindenburg's allegations, and its postponed 10-K filing raise too many red flags. That's why I'd stick with Nvidia instead of Supermicro as my top AI play.
