Infrastructure spending for this transformative technology is about to explode.
Dan Ives is an equity research analyst at Wedbush Securities. He covers the biggest names in the tech sector and always seems to be on top of the latest mega trends.
Right now, artificial intelligence (AI) is making the biggest headlines in technology. But one area of AI that might be overlooked is information technology (IT) infrastructure. What does that actually mean?
Here’s how infrastructure fits into the AI story, and why Super microcomputer (SMCI -2.39%) is my top choice to play on the trend.
IT infrastructure offers enormous opportunities
Developing AI requires a number of advanced hardware and software protocols. One of the most important pieces of this puzzle are chipsets known as graphics processing units (GPUs).
Nvidia And Advanced micro devices are currently two leading GPU developers, but also other major technical leaders Microsoft, AmazonAnd Metaplatforms want to get in on the action.
Investing in these types of products falls under an accounting category called capital expenditures (capex). During a recent interview on CNBC, Ives suggested that AI capex will be a $1 trillion market in the next three years.
So with that said, why do I think Supermicro is a hidden gem?
Image source: Getty Images.
Why Supermicro could benefit from this
Selling GPUs and associated software is only part of the story. These important AI-powered products are housed in massive data centers. Within these data centers are massive storage racks with GPUs in very specific architectural designs. This is where Supermicro comes into play.
Supermicro is an IT architecture specialist that designs how GPUs fit into storage clusters. The company is working closely with both Nvidia and AMD, and I see a few obvious catalysts on the horizon.
Specifically, sales of Nvidia’s new Blackwell series of GPUs are expected to reach the billion-dollar mark by the end of the year, according to management and Wall Street analysts. I suspect Supermicro will be intimately involved in the details of how these new products will be optimally housed in data centers, and I see Blackwell as a major tailwind for the company.
Additionally, I wouldn’t be surprised if Supermicro expands its reach into the IT infrastructure landscape as others in the big tech sector start releasing their own chips. To me, rising capital investment is an obvious catalyst that could boost Supermicro’s business in the coming years.
All this said, there are some important things to consider before pouring into Supermicro broth.
An attractive valuation, but be careful
Although Supermicro’s price-to-earnings (P/E) ratio has fallen through 2024, the chart below illustrates a notable decline over the past few months.
SMCI PE ratio data per YCharts
There are two major forces that have led to a sell-off in Supermicro stock. First, the company’s early August earnings report showed how volatile Supermicro’s gross margin can be. Ideally, growth investors want revenue acceleration, margin expansion and rising profits. Supermicro’s business is not that simple.
Infrastructure companies will have a lower margin profile than software companies or companies with pricing power. Frankly, I think investors have simply had a reality check and have to accept that Supermicro’s profit margin may ebb and flow from time to time.
The other factor at play here is that Supermicro was the subject of a report published by short seller Hindenburg Research in late August. Although short reports are often perceived negatively, there is an important caveat: short sellers have a vested interest in seeing a stock price fall.
Although Supermicro delayed the filing of its annual report after Hindenburg’s report alleged that the company had manipulated its accounting, little has emerged from the brief report other than speculation and plummeting shares.
I have to admit that investing in Supermicro carries some risk at the moment. But looking longer term, I see increased investment in capital expenditure and IT infrastructure as a sustainable tailwind that could fuel Supermicro’s business in the long term.
For these reasons, I see Supermicro as the best-positioned company to take advantage of opportunities in AI IT infrastructure.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
