Chip maker Nvidia (NASDAQ: NVDA) is one of the biggest winners of the artificial intelligence (AI) boom. Its share price has risen 455% since August 2021, making it the second-best performing stock in the S&P 500 (SNP INDEX: ^GSPC) over the past three years. The company completed a 10-for-1 stock split in June to make shares more affordable.
Server manufacturer Supermicrocomputer (NASDAQ: SMCI) has benefited even more from the AI boom. Its stock price has risen 1,150% since August 2021, making it the best-performing stock in the S&P 500 over the past three years. The company will reset its stock price in September with a 10-for-1 stock split.
Overall, Wall Street analysts believe both stocks will be profitable investments over the next 12 months. Nvidia has a median price target of $145 per share, which represents a 24% upside from the current price of $117. And Super Micro has a median price target of $693 per share, which represents a 56% upside from the current price of $443.
Here’s what investors need to know about these AI stocks.
1. Nvidia
Nvidia reported blockbuster financial results for the second quarter of fiscal year 2025 (ending July 2024). Revenue rose 122% to a record $30 billion, driven by particularly strong growth in the data center segment. Gross profit margin expanded 450 basis points and non-GAAP earnings rose 152% to $0.68 per diluted share.
CEO Jensen Huang said: “Spectrum-X Ethernet [networking] for AI and Nvidia AI Enterprise software are two new product categories that are reaching significant scale, demonstrating Nvidia’s full-stack, data center-scale platform.”
Nvidia is best known for its graphics processing units (GPUs), chips that have become the industry standard for accelerating complex data center workloads, such as training machine learning models and running artificial intelligence (AI) applications. Nvidia regularly sets performance records on the MLPerfs, objective benchmarks that measure the training and inference capabilities of AI systems. And the company has more than 80% market share of AI chips, according to analysts.
What really sets Nvidia apart, however, is that it offers a full-stack computing platform that includes hardware, software and services. To take things a step further, the company complements its GPUs with high-performance networking gear and central processing units (CPUs). It also offers software and services that streamline the development of AI applications. In a recent note, Argus’s Jim Kelleher wrote, “Nvidia stands out because it’s participating in so many parts of the dynamic AI economy.”
Looking ahead, Wall Street expects Nvidia’s adjusted earnings to grow 44% annually through fiscal 2026. That makes its current valuation of 53 times adjusted earnings reasonable. Investors looking to initiate a position or increase their exposure to Nvidia should consider buying a few shares today.
2. Supermicrocomputer
Supermicro reported mixed financial results in the fourth quarter of fiscal 2024 (ended June 30). The good news: Revenue topped estimates, rising 143% to $5.3 billion on record demand for AI infrastructure. The bad news: Gross margin fell 580 basis points to 11.2%, so non-GAAP earnings rose just 78% to $6.25 per diluted share. Analysts had expected non-GAAP earnings to grow 132% to $8.14 per diluted share.
However, management attributed the shortage to the costs associated with ramping up direct liquid cooling (DLC) production capacity. While those investments are a temporary headwind, they should pay off in the long run. Super Micro is already the market leader in AI servers, but investing in DLC technology could help the company gain market share. Liquid cooling is more efficient than traditional air cooling, so demand for DLC solutions should keep pace with demand for AI servers, simply because AI servers generate a lot of heat.
Importantly, Super Micro expects gross margins to normalize to between 14% and 17% by the end of fiscal 2025 as DLC solutions begin shipping in greater volumes. That means profitability should improve in the coming quarters. CEO Charles Liang told analysts, “We are well positioned to become the largest IT infrastructure company.” Shareholders, however, got some bad news this week.
Shares of Super Micro fell 20% on Wednesday, August 28, after a report from short-seller Hindenburg Research cited “accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures.” But Samik Chatterjee at JPMorgan Chase dismissed the situation in a recent note to clients. “We find the report largely devoid of details about alleged wrongdoing by the company that would change the medium-term outlook.”
Hindenburg’s short report puts investors in a tough spot. Super Micro’s stock could fall further if evidence of wrongdoing comes to light. Conversely, the stock could recover quickly if no evidence emerges. Personally, I think risk-tolerant investors should consider a very small position today. Wall Street expects Super Micro to grow its earnings 43% annually through fiscal 2026. That estimate makes its current valuation of 20 times earnings seem cheap.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends JPMorgan Chase and Nvidia. The Motley Fool has a disclosure policy.
2-Stock Split AI Stocks Up 455% and 1,150% in 3 Years to Buy Now, According to Wall Street was originally published by The Motley Fool
