This artificial intelligence (AI) stock could be the next Nvidia

By | March 4, 2024

Finding the next great stock, like a Amazon or, more recently, Nvidia (NASDAQ: NVDA)is the dream: one stock that can generate portfolio and life-changing returns, sometimes very quickly. Super microcomputer (NASDAQ: SMCI) has given investors the best Nvidia impression. The stock is up as much as 750% in the past year.

Nowadays, a stock rarely rises so quickly. That’s why it may seem wild for me to predict it will continue. Of course, success may not be a straight line. Still, I believe Supermicro, as it’s better known today, could easily emulate Nvidia’s epic multi-year run and skyrocket in the coming years.

Supermicro becomes the market leader in its field

The recipe for Supermicro’s success is simple. Dominant leadership in a fast-growing industry equals outperformance. Investors are already seeing the comparison come true, which helps explain the stock’s remarkable success. My prediction is based on the simple theory that artificial intelligence (AI) spending will continue well into the future.

First the basics. Supermicro is an innovator in computer hardware. It started with motherboards in the early 1990s, but now sells ready-made modular server systems to companies. Do you know how to build a computer from scratch? Many companies don’t either. So, as most would do, they turn to an expert like Supermicro.

Supermicro’s modular system can easily be scaled to the size a business needs and can be built upon in the future as needs grow. Like Nvidia’s AI chips, customers are flocking to Supermicro for their AI needs:

The Growth of Super Micro Computer vs. the Industry.

Image source: Super Micro Computer.

Management bases this on internal data and industry data Gartner. Supermicro’s revenue grew 103% year over year in the second quarter of fiscal 2024 (ending December 31, 2023), and is expected to grow up to 218% year over year in the current quarter .

A fast growing industry

The million dollar question, of course, is whether this can last. According to the people most connected to AI, it can and will do just that. OpenAI CEO Sam Altman recently made headlines with his call to expand global chip capacity, claiming that trillions of dollars would need to be invested for the cause. Nvidia CEO Jensen Huang predicted another $1 trillion in data center spending in the coming years.

If these predictions are even remotely accurate, Supermicro, which generated just $3.7 billion in revenue in the second quarter, may be poised for more opportunities than it can shake a stick at. Ultimately, this will have to happen, and the inability to support demand could send business to Supermicro’s competitors. However, it’s hard to see how Super Micro Computer doesn’t have every opportunity to meet these sky-high expectations for long-term growth.

A surprisingly reasonable valuation

Given the above situation, it is reasonable to expect growth estimates to increase. That has already happened. Analysts expect long-term earnings growth of an average of 48% per year. This seems realistic for a company that is now growing at triple digits.

At a forward price-to-earnings ratio of just 40, Supermicro’s price-to-earnings-growth ratio (PEG) is less than 1, indicating that the stock is still a buy for its expected future growth potential.

SMCI PE ratio (forward) chartSMCI PE ratio (forward) chart

SMCI PE ratio (forward) chart

There is a fascinating psychological phenomenon called anchoring bias, where the mind gets stuck on the first number it sees. In other words, investors see how much Supermicro has risen over the past year and assume the stock must be expensive. Frankly, most stocks are too expensive when they rise that much in a year.

However, data shows that Supermicro could be the exception. Now there are investment risks because you are projecting things into the future. Nothing is guaranteed in life. However, the data and recent financial performance point to a bright future for Super Micro Computer and its shareholders.

Should You Invest $1,000 in Super Micro Computer Now?

Consider the following before buying shares in Super Micro Computer:

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Amazon and Nvidia. The Motley Fool recommends Gartner and Super Micro Computer. The Motley Fool has a disclosure policy.

Prediction: This Artificial Intelligence (AI) Stock Could Be the Next Nvidia Originally published by The Motley Fool

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