Investors have been waiting for decades for a new innovation or trend that could do what the Internet did for American businesses about three decades ago. After much patience, the artificial intelligence (AI) revolution seems to have answered the call.
The appeal of AI is the ability of software and systems to learn without the need for human intervention. This ability to evolve over time and become more proficient at assigned tasks, or even learn new skills altogether, gives the technology a limitless ceiling in the long term.
In less than 18 months, the euphoria surrounding AI evaporated Nvidia‘S (NASDAQ: NVDA) market cap surpassed $3 trillion and forced a historic 10-for-1 stock split. But after Nvidia’s monster rise, some Wall Street analysts have turned their attention to other hypergrowth AI stocks that they believe offer upside of upside of up to 243%.
Headwinds are mounting for Wall Street’s AI darling
While there are plenty of analysts on Wall Street who still see the potential in Wall Street’s AI darling, there’s no denying that Nvidia is facing increasing headwinds.
Historical precedent is easily the biggest red flag. Over the past 30 years, no next-big-thing innovation or trend has avoided an early-stage bubble. That is, investors often overestimate the uptake and utility of new technologies. The fact that most companies currently lack a clear plan for how they will use AI to grow revenue and increase profits is evidence that artificial intelligence is likely the next in a long line of early-stage bubbles.
Outside of history it is impossible to ignore the external factors And internal competitive pressures Nvidia faces. Despite an estimated 98% share of the data center graphics processing unit (GPU) market share in 2022 and 2023, Nvidia’s share of the pie is likely to shrink as new AI GPUs enter the market.
In addition, the four largest customers by net revenue, all members of the “Magnificent Seven,” are developing AI chips for use in their data centers. Even if Nvidia’s AI GPUs retain their computing advantages, which is highly likely, these four top customers will use their own chips to complement Nvidia’s hardware. This will reduce Nvidia’s future chances of winning valuable data center “real estate” from America’s most influential companies.
Finally, Nvidia’s adjusted gross margin declined for the first time in two years in its fiscal second quarter (ended July 28). AI GPU scarcity has fueled the company’s pricing power and rapid gross margin expansion. But as that scarcity diminishes, Nvidia’s pricing power and gross margin should decline.
Rather than focusing on Nvidia, some Wall Street analysts see greater upside potential in the following two high-growth AI stocks.
Snowflake: Implied Upside of 93%
The first AI stock to gain momentum that at least one Wall Street analyst predicts will surpass Nvidia is a cloud-based data warehouse giant Snowflake (NYSE: SNOW). Analyst Kash Rangan of Goldman Sachs believes Snowflake can reach $220 per share, which would represent a gain of about 93%, based on the end of August.
Rangan added Snowflake to Goldman’s “Conviction List” in July, believing the company is ideally positioned for the next phases of the AI revolution, or the phase(s) in which platforms and AI applications benefit the most.
Snowflake’s appeal has long been its superior growth rate and well-defined competitive advantages. Its infrastructure is layered on the most popular cloud infrastructure service platforms to eliminate data sharing constraints for its customers.
Additionally, it has eschewed the traditional subscription model in favor of a pay-as-you-go platform that charges customers based on how much data they store and how many Snowflake Compute Credits they use. There’s no doubt that this cost transparency resonates with its customers.
Unfortunately, Snowflake’s once-staggering growth has cooled significantly. Organic year-over-year growth rates, which topped 70% as recently as the second quarter of fiscal 2023 (ending July 31, 2022), are now below 30%. While the company has an impressive $5.2 billion backlog at its disposal and is adding increasingly big fish to its customer base, the valuation premium it once commanded no longer makes sense.
To get close to Rangan’s price target, Snowflake needs to significantly improve its adjusted profitability and stabilize its year-over-year revenue growth around 25%.
Super Micro Computer: Implied Upside of 243%
A second hyper-growth AI stock with a tantalizing upside, based on a Wall Street analyst’s forecast, is rack server and storage solutions specialist Supermicrocomputer (NASDAQ: SMCI)Loop Capital’s Ananda Baruah expects Super Micro shares to eventually hit $1,500, which would represent a more than threefold increase from their Aug. 30 closing price.
Loop’s price target for Super Micro is based on the company’s strong position in the AI server market. Companies looking to gain a first-mover advantage in the AI space will need to invest aggressively in the infrastructure needed to do so.
We’ve certainly seen evidence that demand for Super Micro’s servers is incredibly strong. After posting 110% net revenue growth in fiscal 2024 (ended June 30), the company’s midpoint of fiscal 2025 revenue guidance ($28 billion) implies 87% revenue growth year-to-date. Despite Wall Street consensus calling for earnings per share of over $45 in fiscal 2026 (ended June 30, 2026), Super Micro is currently valued at a forward price-to-earnings (P/E) ratio of less than 10.
It almost seems too good to be true – and maybe it is.
Last week, well-known short-seller Hindenburg Research published a report that, among other things, provided evidence of accounting manipulation at Super Micro Computer. This short-seller report was followed days later by Super Micro delaying the filing of its annual report. While this is not an admission of wrongdoing, nor does it validate Hindenburg’s findings, it does stir the pot at a sensitive time for the company.
Moreover, Super Micro Computer has previously failed to deliver on its lofty growth expectations. Aggressive sales growth projections during the first cloud computing boom in the mid-2010s failed to materialize. Given what history teaches us about next-big-thing innovations and the time they take to mature, skepticism about Super Micro seems justified, despite its historically low valuation.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia and Snowflake. The Motley Fool has a disclosure policy.
Forget Nvidia: 2 Hyper-Growth AI Stocks With Potential Up to 243% Upside, According to Select Wall Street Analysts was originally published by The Motley Fool
