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 Super microcomputer(NASDAQ: SMCI) And Nvidia(NASDAQ: NVDA) were the best performing members of the S&P500(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, companies are still in the early stages of building out their AI infrastructure, and Wall Street believes continued investment in supercomputer chips and servers will drive shares of Supermicro and Nvidia higher over the next twelve months. Here you will find price targets The Wall Street Journal:
Of the twenty analysts covering Supermicro, the average price target is $67.50 per share. This forecast implies an upside of 41% from the current share price of $48.
Of the 64 analysts covering Nvidia, the average price target is $150 per share. This forecast implies a 7% upside from the current stock price of $140.
Here’s what investors need to know about Supermicro and Nvidia.
Super Micro Computer produces high-performance computing platforms, including servers and full server racks, optimized for AI. The company handles most product development and assembly in-house at facilities in Silicon Valley, using electronic building blocks to quickly build a wide range of servers with the latest chips. This often allows Supermicro to bring new products to market two to six months earlier than the competition.
In March, Rosenblatt analyst Hans Mosesmann wrote: “Super Micro has developed a model that gets to market very, very quickly. They usually have the broadest product portfolio when a new product comes out.” That time-to-market advantage, coupled with a broad product selection, has brought Supermicro to the forefront of the AI server industry, which is expected to grow 30% annually through 2033.
Supermicro reported mixed results in the fourth quarter of fiscal 2024 (ended June 30). Revenue rose 143% to $5.3 billion, but gross margin shrank nearly 6 percentage points to 11.2%, and non-GAAP (generally accepted accounting principles) net income rose just 78%. Margins contraction may be a symptom of reduced pricing power due to increased competition, but management expects gross margins to normalize between 14% and 17% as liquid-cooled servers become available in higher volumes by the end of fiscal 2025 sent.
Importantly, short seller Hindenburg Research accused Supermicro of accounting manipulation in August The Wall Street Journal said the company was investigated by the Justice Department in September. Supermicro was fined for accounting manipulation in 2020, after which its stock was temporarily delisted from the Nasdaq Exchange as the company filed its Form 10-K for the 2017 fiscal year nearly two years late.
This time a similar series of events plays out. Supermicro has yet to file its Form 10-K for fiscal year 2024, despite having to do so by August 29, and the company has received a letter of non-compliance from the Nasdaq Exchange. Although the stock market listing 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 issues hanging over the company.
That said, Wall Street still expects the company’s earnings to rise 54% over the next twelve months, making its current valuation of 21.7 times adjusted earnings look quite cheap. At that price, risk-tolerant investors can buy a small position in Supermicro stock, provided they know that regulatory issues could make the stock volatile in the coming months.
Dan Ives of Wedbush Securities has called Nvidia the “foundation of the AI revolution.” Its graphics processing units (GPUs) power the most advanced artificial intelligence systems, giving the semiconductor company a more than 80% market share in AI accelerators. That leadership is reinforced by CUDA, a robust ecosystem of software tools that enable developers to write GPU-accelerated applications in a range of domains from computational chemistry to machine learning.
In addition, Nvidia has a significant advantage with its full-stack computing platform that includes hardware, software and services. Since acquiring networking specialist Mellanox in 2019, Nvidia has achieved 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 increase 29% annually through 2030, while spending on AI hardware, software and services will increase 36% annually. Nvidia is one of the companies best positioned to benefit from this, as it participates in so 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,” said analysts at Morgan Stanley.
Wall Street expects Nvidia’s adjusted profits to rise 54% over the next year. That estimate makes the current valuation of 63.3 times adjusted earnings seem reasonable. To be clear, the stock is neither cheap nor excessively expensive. Patient investors should feel good about buying a small position in Nvidia today.
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Trevor Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
2 Stock Split Artificial Intelligence (AI) Stocks Soar 650% and 1,030% in Two Years to Buy Now, According to Wall Street Originally Published by The Motley Fool
