Split stocks Nvidia and Super Micro Computer led the market rally this year.
Two artificial intelligence (AI) stocks have led the S&P 500 (^GSPC 1.15% ) gains this year: Shares of semiconductor company Nvidia (NVDA 4.55% ) and server maker Super Micro Computer (SMCI 1.39% ) have risen 159% and 119%, respectively.
Both companies recently announced 10-for-1 stock splits to make their shares more affordable — Nvidia completed its split in June, and Super Micro Computer is set to follow suit in late September — but Wall Street analysts expect both companies' shares to rise even further over the next 12 months.
Nvidia's median target of $140 per share represents a 10% upside from the current price of $127, and Super Micro's median target of $693 per share represents a 16% upside from the current price of $600, but I think Super Micro's stock will rise 100% next year, reaching a split-adjusted price of $120 by August 2025.
That being said, patient investors should consider buying both stocks.
NVIDIA: Blackwell shipment delays create uncertainty ahead of earnings
Nvidia reported stellar first quarter results, well beating expectations on both revenue and earnings. Revenue increased 262% to $26 billion and non-GAAP net income increased 461% to $6.12 per share. CEO Jensen Huang said, “Our data center growth was driven by strong and accelerating demand for generative AI training and inference on our Hopper platform.”
But shipments of Nvidia's Blackwell GPUs will be delayed by three months due to a design flaw that was “discovered fairly late in the production process,” according to The Information. The Blackwell chips can run training and inference workloads faster than the previous Hopper generation, which should further solidify Nvidia's leadership position in AI chips.
Following the news, Nvidia's shares fell to their lowest level since May, but the stock has since recovered and the market sees little reason to worry. Indeed, Deutsche Bank analyst Ross Seymour doesn't believe Blackwell's delay will have a material impact on Nvidia's near-term outlook or its ability to meet Wall Street forecasts.
But investors should tread cautiously: Management hasn't yet addressed the issue, and it's an unknown that will be explored when the company reports earnings on Aug. 28. Expectations were already running high after Nvidia beat Wall Street expectations by a wide margin in recent quarters, and any bad news could send the stock plummeting.
Going forward, Wall Street expects Nvidia's earnings to grow 37% annually over the next three years. As such, the current valuation of 75 times earnings, while not outrageously high, seems a bit expensive. Patient investors could buy a very small position today if they are willing to accept the possibility of a share price decline following the earnings release. In that scenario, investors should consider buying a slightly larger position on the dip.
Supermicro: AI server market leader expected to expand share
Super Micro Computer designs server and storage solutions for cloud and private data centers. Its in-house manufacturing capabilities and proprietary building-block approach to product development enable the company to quickly build servers with the latest chips from suppliers such as Nvidia. As a result, Super Micro can get to market two to six months faster than its competitors, says CEO Charlies Liang.
This advantage has made Supermicro a leader in artificial intelligence (AI) servers, and analysts expect the company to gain share quickly. Bank of America analysts expect Supermicro to account for 17% of AI server sales by 2026, up from 10% last year. KeyBanc's Tom Blakely is more bullish. He thinks Supermicro's market share could surpass 20% this year, and said the company has “competitive advantages that it can sustain even if it doesn't gain this share in the coming years.”
Supermicro reported mixed results for its fourth fiscal quarter ended June 30. Revenue rose 143% to $5.3 billion as demand for AI infrastructure hit a record high. But gross margins fell 5.8 percentage points to 11.2%, and non-GAAP net income rose 78% to $6.25 per share. Wall Street had expected non-GAAP earnings to rise 130% to $8.14 per share.
The company's stock price plummeted following the report, reflecting concerns that Supermicro's lack of pricing power in an increasingly competitive market is shrinking its margins. However, CEO Charles Liang attributed the margin decline to costs associated with direct liquid cooling (DLC) components. Moreover, he expects gross margins to normalize to 14%-17% by the end of fiscal 2025 (ending June 2025) as DLC server shipments increase.
Importantly, investment in DLC technology could strengthen Super Micro's position as a market leader in AI servers. Because liquid cooling is more cost-effective than traditional air cooling, demand for DLC servers is expected to grow rapidly over the next few years as data centers become filled with powerful AI hardware that generates large amounts of heat. Super Micro has positioned itself as an early leader in DLC technology.
Going forward, Supermicro's outlook for fiscal 2025 projects revenue growth of 74% to 101%. If the company hits the top end of that range, the stock could rise 100% with no change in price-to-sales multiple. Also, the company's stock is currently trading at 2.5 times sales, which is a discount to its trailing 12-month average of 3.3 times sales. Therefore, I am confident that Supermicro's stock will double by August 2025.
