Here’s A Better AI Pick Than Nvidia

Given its better valuation, we believe Super Micro Computer stock (NASDAQ: SMCI) is a better pick compared to its AI peer, Nvidia stock (NASDAQ:NVDA) for the next three years. NVDA stock trades at 26x revenues, versus about 2x for SMCI. We think this gap in their valuation will narrow in favor of Super Micro Computer, given its more favorable valuation and potential for future revenue growth. There is more to the comparison, and in the sections below, we discuss why we think SMCI will outperform NVDA in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation.

1. Returns For SMCI Stock Have Been Better Than For NVDA

NVDA stock has seen strong gains of 710% from levels of $13 in early January 2021 to around $105 now, vs. an increase of about 45% for the S&P 500 over this roughly 4-year period. In comparison, SMCI stock has fared even better, rising by 1,185% from $30 in early January 2021 to around $385 now.

Admirably, SMCI is one of the handful of stocks that have outperformed the broader market in each of the last 4 years. Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023. Looking at NVDA, it saw returns of 126% in 2021, -50% in 2022, and 239% in 2023. – indicating that NVDA underperformed the S&P in 2022.

While SMCI has been an exception, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; even for heavyweights in the tech sector, including mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Super Micro’s Revenue Growth Has Been Better

Nvidia has seen its revenue rise at an average annual rate of 54% from $16.7 billion in FY’21 to $61 billion in FY’24. In comparison, Super Micro’s sales have grown at an average rate of 61% from $3.56 billion to $14.9 billion over this period. Our Nvidia Revenue Comparison dashboards provide more insight into Nvidia’s sales.

Nvidia has posted surging revenue growth driven by demand for its high-end graphics processing units (GPUs) which have emerged as the defacto silicon for running artificial intelligence applications. Nvidia’s chips are seen as the gold standard in the space, and the company has also invested in building a software ecosystem around its products, helping it to potentially better lock in customers. Moreover, AI models are increasingly multimodal, moving from just text processing to working with speech, images, video, and 3D calling for higher computing power and consequently higher GPU demand. That being said, competition is mounting, with other players including AMD and Intel doubling down on the space, with big tech giants like Google and Amazon – who happen to be among Nvidia’s largest customers – also designing their own AI silicon. While consensus estimates project that the company will grow revenue by over 120% this year, growth rates could moderate considerably in the coming years. See our analysis of how Nvidia stock could crash to $40.  We also present an upside case on how Nvidia stock could rally to $300.

Super Micro Computer is a data center solutions provider, which sells server systems, server boards, storage, networking solutions, management software, and installation and maintenance services. Data center-related spending has surged as tech companies scramble towards boosting their AI and accelerated computing capacity. Super Micro has doubled down on this space by introducing servers optimized for training large language models and AI workloads. Per Susquehanna, capital expenditure spending by the top cloud computing providers is likely to grow by 55% year-over-year in 2024.  Super Micro’s customers are also likely to opt for more premium products. For example, the company estimates that the costly liquid-cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of server racks it ships next year. The company is also steadily boosting its production capacity with a new facility in Malaysia that can produce over 5,000 racks of server kits every month. Consensus estimates project that the company will grow revenue by about 89% in FY25.

3. Nvidia Is More Profitable

Nvidia’s operating margin has expanded from 35% in 2020 to 54% in FY’24, while Super Micro Computer’s operating margin grew from levels of around 3% to 8.5% over the same period. While Nvidia’s margins have been much better, SMCI has seen strong margin expansion too thanks to its stellar revenue growth rates over the last few years.

4. Nvidia Fares Better In Terms of Financial Risk

Looking at financial risk, Nvidia’s 0.4% debt as a percentage of market cap is well below the 10% metric Super Micro Computer, while its 1.5% cash as a percentage of market cap is below 7.5% for the latter. This implies that Nvidia has a better debt position, although Super Micro has a better cash cushion. Overall, it may be fair to assume that Nvidia’s financial risk is a bit lower than Super Micro, although Super Micro is not exactly in a vulnerable position given its healthy cash cushion.

5. The Net of It All

We see that Super Micro has seen better historical revenue growth, better margin expansion, and more cash cushion. On the other hand, Nvidia has a more favorable debt position and its growth is expected to outpace Super Micro this year, per consensus estimates.  Now, looking at the prospects and valuation, we believe Super Micro is the better choice of the two. At its current levels, Nvidia stock is trading at 26x revenues, compared to the stock’s last three-year average P/S ratio of 20x. In comparison, Super Micro stock is trading at 2x revenues, versus the stock’s average P/S ratio of 1.4x seen over the last three years. Overall, we think the risk-to-reward ratio appears more favorable for Super Micro, making it the better pick of the two.

While SMCI may outperform NVDA over the coming years, it is helpful to see how Nvidia’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/9/2024
[2] Cumulative total returns since the end of 2016

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