Nvidia vs Super Micro Computer: Which Is Best?

The AI hype has led both NVIDIA Corp (NVDA) and Super Micro Computer (SMCI) stocks to skyrocket over the past year but which one is best?

Ever since ChatGPT emerged, AI has been the buzzword on Wall Street. Generative AI’s capability to perform human tasks has taken the world by storm. This rise has been so spectacular that its benefits are forecast to add about $2.60-$4.40 trillion annually. The rise in generative AI is also expected to increase the impact of all AI by 15-40%.

Spending on artificial intelligence has skyrocketed over the past year. The International Data Corporation (IDC) expects global spending on AI solutions to reach more than $500 billion in 2027.

While many tech beneficiaries from this AI boom exist, two stand out: the $2 trillion-dollar semiconductor juggernaut NVIDIA Corporation (NASDAQ:NVDA) and the up-and-coming IT solutions company Super Micro Computer, Inc. (NASDAQ:SMCI).

These two stocks have provided skyrocketing returns for quite some time. While the companies are not in direct contention with each other in terms of market share, they do overlap to some extent and both show considerable promise.

Over the past year, NVIDIA gained approximately 300%, while Super Micro Computer (also known as Supermicro) soared more than 1,150%.

To put this into context, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which represents the broader market, has increased by 33.5% over the same time frame.

However, which stock should be a better buy at this juncture? 

NVIDIA Makes AI Possible

Chip giant NVIDIA became the first mover in the graphics market when it invented the Graphics Processing Unit (GPU) in 1999.

GPUs are foundational for AI operations, enabling more efficiency and speed. In fact, ChatGPT’s large language model (LLM) is trained on NVIDIA’s chips.

The company is regarded as a gateway to investing in AI. Including GPUs and networking, NVIDIA powers more than 75% of the global top 500 list supercomputers, supporting more than 3,500 applications.

The company’s fundamentals improved significantly last year after a lackluster performance in the previous year. Macroeconomic factors impacted the company in fiscal year 2023 (which ended on January 29, 2023).

Revenue flatlined in fiscal 2023, with a 27% year-over-decline in the gaming segment as the company reduced its channel inventory levels. In addition, sales in China were impacted by new government restrictions.

The U.S. government imposed a new license requirement for the export of its A100 and H100 chips to China. The company also reported that this could result in a loss of $400 million in potential sales.

Moreover, NVIDIA called off its Arm acquisition, resulting in an increment of $1.35 billion in acquisition termination charge to its operating expenses.

But flatlining sales were not an isolated case. An industry-wide slowdown in chip sales was observed at the tail end of 2022 due to short-term macroeconomic issues. NVIDIA CEO Jensen Huang believed that AI was at an “inflection point” in the company’s growth trajectory.

This optimism materialized in fiscal 2024, when revenue increased by 126% from the prior year to $60.92 billion, while non-GAAP earnings grew by 286% year over year to $32.31 billion.

Although smaller business segments did not exhibit astronomical growth, NVIDIA’s data center revenues (the segment related to its costly AI chips) rose 217% from the prior year to $47.50 billion. The company also briefly topped Apple Inc.’s (NASDAQ:AAPL) market capitalization last month.

While NVIDIA’s significant AI prospects and its appeal to consumers and investors alike are apparent, the market is becoming increasingly crowded.

Industry leaders like Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) are stepping up their AI chip game, while startups like Sambanova, Groq, Cerebras, and Tenstorrent are also trying to level the playing field.

The Rising Star Is Super Micro Computer

Supermicro provides accelerated computing platforms for a variety of markets, including cloud computing, edge computing, data centers, and AI. The Silicon Valley-based company is not directly in competition with NVIDIA, as its GPU server systems in fact depend heavily on NVIDIA chips.

Over the years, SMCI has become a rising star in the IT solutions market, with a deep focus on AI. The company has received a lot of attention from investors. Its IPO was priced at $8 per share, but those shares have appreciated about 135x since.

Its financials are also growing rapidly. As of fiscal year 2023 (ended June 30, 2023), Supermicro’s annual net sales of $7.12 billion were six times what they were ten years ago.

Fiscal 2023 also saw its net income jump 124% from the prior year to $640 million, as the company managed to lower its operating expenses as a percentage of revenue by 1.6 percentage points to just 7.3%, underscoring growing efficiency.

For the rest of the calendar year 2023, which the company deems as the first half of fiscal 2024, its top line grew significantly on the back of continued demand for its AI platforms and rack-scale IT solutions.

Gaining market share has led the company to raise its fiscal 2024 revenue guidance from a range of $10-$11 billion to $14.30-$14.70 billion. However, these estimates may very well be conservative as indicated by the company’s history of topping annual sales estimates since fiscal 2020.

Aligning with this ambition, last month, a significant upsize in its AI solutions portfolio was declared. It was included in the S&P MidCap 400 index this month, which resulted in a huge pop in its share price.

On a more pessimistic note, Goldman Sachs analysts are not very bullish on the stock’s prospects and have initiated coverage with a “Neutral” rating, which could be attributed to the stock’s speculative valuation.

The skittish rating may be justified given that the forward non-GAAP P/E ratio is 76.29, which looks very expensive by industry standards. However, because of its high-flying earnings growth, the forward non-GAAP PEG ratio stands at only 1.02.

NVIDIA vs SMCI Stock: Which Is Best?

While SMCI has grown rapidly, Nvidia has a much wider moat, larger revenues and is a key supplier to SMCI, making it the better business.

AI is here to stay. Although the storm will pass eventually, the impact that AI has created over the past few years is expected to remain prominent. Hence, AI-related companies will almost certainly continue to experience rising and sustained demand.

NVIDIA emerged as a darling of the AI boom, overtaking multiple tech titans in a brilliant run. On the other hand, Supermicro, while not as popular as the chip giant, has enjoyed phenomenal growth.

The bottom line is the chip giant Nvidia has a wider moat and Wall Street analysts are expecting a modest upside in the stock, while Supermicro’s high-flying valuation indicates a correction. Moreover, Morgan Stanley sees NVIDIA’s B100 GPU chips to be a near-term AI game changer.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.