The S&P500 (SNPINDEX: ^GSPC) up 25% over the past year, and excitement about artificial intelligence (AI) has been a major source of momentum. Indeed, AI chipmaker Nvidia alone was responsible for 18% of those profits, according to Morning star.
Despite those staggering statistics, there are plenty of options outside of Nvidia. For example, the following Wall Street analysts see significant upside potential Super microcomputer (NASDAQ: SMCI) And Snowflake (NYSE: SNOW)two companies well positioned to make money with AI.
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Loop Capital analyst Ananda Baruah has given Super Micro Computer a price target of $1,500 per share, implying an upside of 91% from the current price of $784 per share.
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Morgan Stanley Analysts led by Keith Weiss have given Snowflake a bull-case price target of $345 per share, implying an upside of 154% from the current price of $136 per share.
Investors should never put too much faith in price targets, but Supermicro and Snowflake certainly deserve further consideration. Here are the important details.
1. Super microcomputer
Super Micro Computer designs and manufactures computing platforms for enterprise and cloud data centers. Its products include high-performance servers and storage solutions optimized for artificial intelligence (AI) applications. In fact, Supermicro is the leading manufacturer of AI servers, thanks in part to its in-house design capabilities and building block development strategy.
To elaborate on this further, because Supermicro can quickly equip its platform building blocks with the latest chips and interconnects from suppliers such as Nvidia and Intel, the company is often the first to market with new technologies. CEO Charles Liang highlighted that benefit during the most recent earnings call. “We provide optimized AI solutions at scale, which deliver a time-to-market advantage and shorter lead times over our competition.”
Supermicro’s building block approach to product development also offers customers great flexibility in designing custom solutions. Particularly because the platform building blocks come together in so many different combinations, Supermicro is said to offer the broadest and deepest portfolio of advanced server and storage solutions in the IT industry.
The result of that advantage is that Supermicro’s revenue grew about five times faster than the industry average last year, meaning it has gained substantial market share. In April, KeyBanc’s Tom Blakely estimated in April that Supermicro accounted for 10% at the time, but he believes its market share will reach 23% by the end of 2024.
Wall Street expects Supermicro to grow earnings per share 47% annually over the next three to five years. That estimate seems reasonable considering that the AI server market is expected to grow 27% annually through 2029. Assuming Wall Street is right, the current valuation of 44 times earnings seems rather cheap, as it yields a PEG ratio of less than 1.
Investors shouldn’t expect a 91% return over the next year, but Supermicro stock is reasonably priced and the stock has a good chance of beating the S&P 500 over the next three to five years.
2. Snowflake
Snowflake allows companies to store, transform and analyze data on a single platform that runs on all three major public clouds. The platform also features a data sharing marketplace, which creates a network effect that makes Snowflake increasingly valuable to customers as more data is uploaded.
Snowflake is unique in its ability to offer these capabilities on a single platform spanning multiple public clouds, Morningstar said. That product differentiation means the company is well positioned to benefit as companies spend more on data analytics, a market expected to grow rapidly in the coming years. In concrete terms, sales via data lakes and data warehouses are expected to increase by 24% annually until 2030.
Snowflake reported mixed financial results in the first quarter. Customer numbers increased by 21% to 9,822 and the average existing customer spent 28% more. In turn, revenue rose 33% to $829 million, but non-GAAP net income fell 4% to $52 million.
Management also made some mixed adjustments to full-year expectations. Revenue growth is now expected to reach 24% in fiscal 2025 (ending January 2025), up from the previous estimate of 22%. But non-GAAP operating margin is expected to be 3%, down from the previous estimate of 6%.
The combination of the first quarter net profit decline and the reduction in full-year margin guidance has investors concerned. Snowflake shares have fallen 17% since the company reported earnings on May 22. But management attributes these setbacks to higher GPU spending related to its artificial intelligence roadmap. This means margins should increase as new AI products like Cortex reach scale.
Cortex allows users to analyze data with large language and machine learning models designed for tasks such as summarization and prediction. Snowflake also integrates other generative AI features, such as Snowflake Copilot for encryption, Document AI for data extraction, and Universal Search for finding database objects. Cortex became generally available in May, but its other AI features are still in preview, meaning the company has barely tapped into its AI potential.
Looking ahead, Wall Street expects Snowflake to grow revenue 23% annually over the next three years. That estimate seems low given the enormous demand for data analytics and AI solutions. Nevertheless, the current valuation of 14.9 times sales seems reasonable, even if the consensus estimate on Wall Street is correct. In fact, shares have never been cheaper.
I doubt Snowflake will deliver triple-digit returns in the next year, but investors who buy a small position today could certainly beat the market over the next three to five years.
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Trevor Jennevine has positions at Nvidia. The Motley Fool holds and recommends positions in Nvidia and Snowflake. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 relying on Intel and short May 2024 $47 relying on Intel. The Motley Fool has a disclosure policy.
Beyond Nvidia: 2 Artificial Intelligence (AI) Stocks to Buy Before They Surge 91% and 154%, According to Select Wall Street Analysts was originally published by The Motley Fool
