C3.ai (NYSE:AI) And Super microcomputer (NASDAQ:SMCI) both appear poised to benefit from the expansion of the artificial intelligence (AI) market. C3.ai develops AI algorithms that connect to an organization’s existing software infrastructure to accelerate and automate specific tasks. Super Micro Computer, better known as Supermicro, is a leading manufacturer of specialty AI servers and server architecture.
However, investors were much more bullish on Supermicro, which has risen more than 2,000% over the past three years. Shares of C3.ai fell more than 50% over the same period and are still trading almost 30% below its IPO price. Let’s see if Supermicro will remain the better AI technology play than C3.ai for the foreseeable future.
Why couldn’t C3.ai impress its investors?
C3.ai primarily serves large government, industrial and energy customers. It generates more than 30% of its annual turnover from a joint venture with the energy giant Baker Hughesbut that deal expires in April 2025. It needs to renew that contract on favorable terms to continue growing in the coming years.
C3.ai’s revenue grew 38% in fiscal 2022 (which ended April 2022), but rose only 6% in fiscal 2023. Growth cooled as it faced fierce competition and intense macroeconomic headwinds that prompted many companies to rein in their software spending. To meet those pressures, C3.ai introduced more consumption-based subscriptions, which generated less consistent revenue than its subscriptions. That shift slowed sales throughout fiscal 2023, but revenue growth accelerated again throughout fiscal 2024, rising 16% for the full year. Rising customer engagement repeatedly offset declining average selling prices for its services as it expanded its consumption-based services.
For fiscal 2025, the company expects its revenue to increase 19% to 27% as it acquires more federal customers and rolls out new tools for the generative AI market. This acceleration is promising, but the share is not cheap at almost ten times this year’s turnover. It is also unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures, and it is prioritizing the development of its new generative AI tools over meaningfully reducing its net losses.
In short, C3.ai’s customer concentration issues, lack of profit, and high valuation likely kept the bulls at bay while other AI stocks soared over the past year. High interest rates also cast an unflattering light on C3.ai’s biggest weaknesses.
Why can’t the bulls get enough of Supermicro?
Supermicro has a smaller share of the server market than Dell Technologies And Hewlett Packard Enterprisebut above all, it produces powerful liquid-cooled servers that can handle complex tasks more efficiently than traditional servers.
That focus made it an ideal partner for Nvidia, which gives Supermicro access to its high-end data center GPUs before many of its larger competitors. Supermicro then carved out its own niche by selling dedicated AI servers.
Supermicro’s revenue and profits rose 37% and 115%, respectively, in fiscal 2023 (which ended last June), as the market’s insatiable demand for new AI servers quickly outpaced available supply. As the AI ​​market continues to grow, analysts expect revenue and profits to increase by 110% and 102%, respectively, in fiscal 2024.
Supermicro now generates more than half of its revenue from AI servers, and that percentage should continue to rise. bank of America expects Supermicro’s share of the dedicated AI server market to increase from 10% to 17% within the next three years, with the overall market growing by 150%.
In other words, Supermicro could still have plenty of room to grow before its business matures. However, investors should be aware that Dell, HPE and other companies are also rolling out new dedicated AI servers to keep pace with Supermicro, and Supermicro will likely face pricing pressure and difficult year-over-year comparisons in the coming years. But for now, Supermicro’s shares still look surprisingly cheap relative to its growth potential of 22 times forward earnings and 2 times this year’s sales.
The better buy: Supermicro
It’s easy to see why the bulls like Supermicro more than C3.ai: it’s growing faster, it has fewer competitors, it doesn’t have customer concentration issues, and its shares are cheaper. It also represents a more direct way to benefit from the growth of the AI ​​market. These core strengths will make Supermicro a better buy than C3.ai.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bank of America and Nvidia. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
Better AI Tech Stock: C3.ai vs. Super Micro Computer was originally published by The Motley Fool
