Amid the ongoing artificial intelligence (AI) boom, shares of Nvidia (NASDAQ: NVDA) And Super microcomputer (NASDAQ:SMCI) have set the stock market on fire in 2024, with gains of 166% and 197% respectively at the time of writing. Thanks to growing demand for the AI-enabled hardware they sell, they have experienced stunning accelerations in their revenue and profit growth.
Nvidia’s dominance of the AI chip market has translated into phenomenal growth, and Super Micro Computer isn’t far behind. Data center operators are flocking to their modular server solutions to mount the AI chips that Nvidia and other companies sell. However, if you want to add an AI stock to your portfolio and choose between one of the two, which stock should you buy now?
The case for Nvidia
Nvidia would control as much as 94% of the AI chip market by the end of 2023. The company’s first-quarter fiscal 2025 results (which ended April 28) suggest its dominance has it on track for another year of stellar growth. .
Revenue rose an astonishing 262% year over year to $26 billion. The impressive pricing power led to a 461% increase in adjusted earnings to $6.12 per share. Management’s revenue guidance of $28 billion for the current quarter suggests revenue is on track to grow 107% year over year, which would be an acceleration from the 101% growth it achieved in the same period last year .
However, emerging growth opportunities in the emerging AI market indicate that Nvidia could ultimately do even better. For example, governments around the world are reportedly pouring huge amounts of money into AI infrastructure, and state investments in AI technology are expected to contribute $10 billion to Nvidia’s revenue this fiscal year, compared to Nothing in the previous.
More specifically, governments want to create large language models (LLMs) in local languages based on country-specific data. During Nvidia’s conference call in May, management pointed out that Japan, France, Italy and Singapore are already investing in AI infrastructure. She expects that more countries will join this trend. “The importance of AI has captured the attention of every country,” says CFO Colette Kress.
For example, Saudi Arabia is reportedly looking to invest $40 billion in AI initiatives, while China’s AI-focused spending is expected to exceed $38 billion by 2027. Meanwhile, major Indian companies such as Tata Group and Reliance Industries are relying on Nvidia’s chips to train LLMs.
In short, Nvidia’s customer base is diversifying beyond the major cloud infrastructure providers that have deployed its chips in large numbers to train and deploy AI models. Spending on AI chips is expected to grow more than tenfold over the next decade, generating $341 billion in revenue by 2033, up from $23 billion last year. The stage seems set for Nvidia to continue its massive growth as it takes strong steps to ensure it remains the dominant player in this space.
That’s why analysts predict the company’s revenue will continue to grow at a healthy pace from nearly $61 billion in fiscal 2024.
So Nvidia should remain a top AI stock as the race to develop AI applications by both companies and governments has created a long-term growth opportunity.
The case for Super Micro Computer
Supermicro’s growth is to some extent intertwined with Nvidia’s. Data center operators need server rack solutions of the type that Supermicro sells to mount the processors sold by Nvidia and other chipmakers. So it’s not surprising that demand for Supermicro’s servers has simply skyrocketed.
In the third quarter of 2024, ending March 31, sales increased 200% year over year. Meanwhile, non-GAAP net earnings per share rose by as much as 307%. So Supermicro isn’t that far behind Nvidia in terms of how AI has boosted its fortunes. The company is targeting revenue of $14.9 billion in the current fiscal year, which ends this month. This would be a big jump from the $7.1 billion in revenue it reported in its 2023 fiscal year.
More importantly, analysts expect sales to almost double in the coming financial years.
The good thing is that Supermicro can maintain a healthy growth rate over the next few fiscal years. That’s because demand for AI servers is expected to grow 25% annually through 2029. The market is expected to generate annual revenues of nearly $73 billion after five years, up from $17.5 billion in 2022.
Supermicro is currently growing faster than the AI server market. It turns out that its growth is faster than that of more established companies such as Dell Technologies, which has sold $3 billion worth of AI servers in the last three quarters. Supermicro generated $9.6 billion in revenue over the past three quarters and generates more than half of its revenue from sales of AI-related server solutions.
Supermicro has been able to make a dent in the AI server market despite the presence of larger players. Furthermore, with the steps the company has taken to increase manufacturing utilization and production capacity, the company could capture a larger share of the AI server market in the future.
Like Nvidia, even Supermicro looks like a solid long-term AI play. But is it worth buying through Nvidia?
The verdict
Both Nvidia and Supermicro are fast-growing companies that are benefiting enormously from the proliferation of AI. Investors’ choice about which shares to buy now will therefore come down to valuation. Supermicro is significantly cheaper than Nvidia in terms of their revenue and revenue multiples.
However, in terms of the price-to-earnings-growth ratio (PEG), the story is a little more interesting. This measure is a forward-looking valuation determined by dividing a company’s earnings growth by the earnings growth the company is expected to achieve in a future period. Any (positive) PEG ratio below 1 is seen by most investors as an indication of a bargain stock. And on that front, both Nvidia and Supermicro are undervalued.
So by at least one forward-looking measure, both Nvidia and Supermicro are attractive buys right now for anyone looking to add a growth stock to their portfolio. More importantly, both companies appear capable of delivering the excellent growth the market expects from them, thanks to the lucrative opportunities they are taking advantage of. And that’s why investors may want to consider buying both stocks despite the stellar gains they’ve made so far this year.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Better Artificial Intelligence (AI) Stock: Nvidia vs. Super Micro Computer was originally published by The Motley Fool
