OpenAI introduced its conversational intelligence application ChatGPT in November 2022. Since then, artificial intelligence (AI) has become one of the hottest investment themes on Wall Street, and AI stocks. District Super Micro Computer (NASDAQ: SMCI) and Nvidia (NASDAQ: NVDA) has been the best member of the S&P 500 (SNPINDEX: ^GSPC).
Specifically, Supermicro and Nvidia saw their shares rise 650% and 1,030%, respectively, over the past two years as unprecedented demand for AI infrastructure led to phenomenal financial results. As a result, both companies reset their rising stock prices earlier this year by completing a 10-for-1 stock split.
However, businesses are still in the early stages of building their AI infrastructure, and Wall Street believes continued investment in supercomputing chips and servers will drive Supermicro and Nvidia shares higher over the next 12 months. Here is the price target provided by The Wall Street Journal:
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Among the 20 analysts who follow Supermicro, the average price target is $67.50 per share. The estimate represents a 41% upside from the stock’s current price of $48.
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Among the 64 analysts who follow Nvidia, the average price target is $150 per share. The estimate suggests a 7% upside from the stock’s current price of $140.
Here’s what investors need to know about Supermicro and Nvidia.
1. Super Micro Computer
Super Micro Computer is a manufacturer of high-performance computing platforms, including servers and complete server racks, optimized for AI. The company handles most product development and internal assembly at facilities in Silicon Valley, and uses electronic building blocks to quickly build a wide range of servers featuring the latest chips. That often allows Supermicro to bring new products to market two to six months before the competition.
In March, Rosenblatt analyst Hans Mosesmann wrote, “Super Micro has developed a very fast-to-market model. It usually has the largest product portfolio when new products come out.” That time-to-market advantage, coupled with a wide selection of products, has brought Supermicro to the forefront of the AI ​​server industry, which is forecast to grow 30% annually through 2033.
Supermicro reported mixed results in the fourth quarter of fiscal 2024 (ended June 30). Revenue increased by 143% to $5.3 billion, but gross profit contracted by almost 6 percentage points to 11.2%, and non-GAAP (generally accepted accounting principles) net income increased by only 78%. Margin contraction may be a symptom of reduced pricing power amid increased competition, but management expects gross margins to normalize between 14% and 17% as liquid-cooled servers ship in higher volumes by the end of fiscal 2025.
Importantly, short-seller Hindenburg Research accused Supermicro of accounting manipulation in August, and The Wall Street Journal said the company was investigated by the Department of Justice in September. Supermicro was fined in 2020 for accounting manipulation, before its stock was delisted from the Nasdaq Exchange because the company filed its Form 10-K for fiscal 2017 almost two years ago.
The same sequence of events takes place this time. Supermicro has not yet filed a Form 10-K for fiscal 2024, although it is scheduled to on August 29, and the company has received a noncompliance letter from the Nasdaq Exchange. While delisting is not imminent and the situation can be resolved without any problems, investors should know that Supermicro is a risky stock due to the regulatory problems that the company has.
Having said that, Wall Street still expects the company’s earnings to grow 54% over the next 12 months, which makes its current valuation of 21.7 times adjusted earnings look cheap. At that price, a risk-tolerant investor could buy a small position in Supermicro’s stock, if he knows the regulatory issues could make the stock volatile in the coming months.
2. Nvidia
Dan Ives at Wedbush Securities called Nvidia “the cornerstone of the AI ​​revolution.” Graphics processing units (GPUs) power the most advanced artificial intelligence systems, so semiconductor companies have more than 80% market share in AI accelerators. Its leadership is reinforced by CUDA, a powerful software ecosystem that enables developers to write GPU-accelerated applications in many domains, from computational chemistry to machine learning.
More than that, Nvidia has a major advantage in a full-stack computing platform that includes hardware, software, and services. Since acquiring networking specialist Mellanox in 2019, Nvidia has gained a leading position in generative AI networking equipment, according to Morning star. Nvidia has also introduced its first server central processing unit (CPU), and its software and services business is expected to reach $2 billion in revenue this year.
Grand View Research estimates that sales of AI accelerators will grow by 29% annually through 2030, while spending on all AI hardware, software, and services components will grow by 36% annually. Nvidia is one of the best companies to benefit from, as it is involved in many parts of the AI ​​economy, and dominates the AI ​​accelerator market. “Competing with Nvidia, a company that spends more than $10 billion a year on R&D, is a difficult feat,” according to analysts at MStanley’s organ.
Wall Street expects Nvidia’s adjusted earnings to grow 54% next year. That estimate makes its current valuation of 63.3 times adjusted earnings look fair. Clearly, the stock is not cheap, nor is it very expensive. Patient investors should be happy to buy a small position in Nvidia today.
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Trevor Jennewine has a position in Nvidia. The Motley Fool has a position and recommends Nvidia. The Motley Fool has a disclosure policy.
2 Stock-Split Artificial Intelligence (AI) Stocks Up 650% and 1,030% in 2 Years to Buy Now, According to Wall Street was originally published by The Motley Fool