Super Micro Computer and Advanced Micro Devices are well positioned and do not appear to be overpriced.
Many artificial intelligence stocks have seen big price swings over the past year, with some soaring to all-time highs and continuing to climb, while others have fallen as investors tempered expectations for the future.
While many AI stocks are not expected to see significant upside, some have the potential for significant growth. Investors looking for stocks with this upside potential may want to consider stocks such as Supermicro Computer (SMCI -19.02%) and Advanced Micro Devices (AMD -2.75%).
1. Supermicrocomputer
While Supermicro's stock price is still down more than 50% from its March peak, it has experienced an astounding increase of more than 3,000% over the past five years.
This tech hardware manufacturing company has been in business since 1993, and began trading on the market in 2007. However, for most of its existence it remained relatively unknown, known only to tech industry insiders.
The company's server technology has become increasingly popular as computing workloads move to the cloud, a trend that accelerated during the COVID-19 pandemic and led to the company's stock price rising. Supermicro was one of the few tech stocks to rise during the 2022 bear market.
Still, the biggest part of the company's stock price increase began in the spring of 2023, when investors discovered that Supermicro's servers were equipped with NVIDIA AI chips. Allied Market Research projects the AI chip market to grow at a compound annual growth rate of 38% through 2032. This expected growth served as a catalyst for Supermicro, driving the company's stock price from just $82 per share in early 2023 to a peak of $1,229 per share in less than 15 months.
Though its stock price has since fallen, the popularity of its servers is helping to bolster its financials. The company has reported revenue of $15 billion for the first half of 2024, up 110% from the same period in 2023. Rising cost of goods sold is weighing on profitability. But its profit of $1.2 billion for the first half of 2024 was up 89% year over year.
Moreover, the drop in stock price may have created a great opportunity for new investors to buy shares. Investors can currently purchase Supermicro shares for 31 times earnings. And despite the company's rapid growth, its price-to-earnings growth ratio (PEG) is just 0.4, suggesting that the market has not fully priced in the company's growth potential into its stock price.
Given the level of demand for the company's servers, Supermicro's growth is unlikely to slow down anytime soon, and given its current low PEG ratio, now may be a good time to add to its stock.
2. AMD
AMD, like most other chip stocks, has been in the shadow of Nvidia, which has had a commanding lead in the AI chip market. While no rival is likely to overtake Nvidia anytime soon, AMD may be the company most likely to become the No. 2 company in the space.
Late last year, AMD introduced its MI300 series of AI chips. Nvidia responded with its own release, but AMD has moved to strengthen its capabilities in the field. The company recently completed the acquisition of Silo AI, Europe's largest AI lab, and also inked an agreement to acquire ZT Systems, an AI infrastructure provider. These additions should improve AMD's competitive position in the data center AI market and help it close some of the technology gap with Nvidia.
The data center division, which includes AI chips, saw revenue grow 98% year-over-year in the first half of 2024, compared with just 6% growth for the company as a whole. The division's revenue of $5.2 billion represented 46% of AMD's total revenue of $11.3 billion in the first half of 2024.
This percentage represents a significant shift for AMD. In the first half of 2023, the data center division accounted for 24% of AMD's revenue, a smaller percentage than its gaming and embedded divisions. Today, the data center division is making up an increasingly larger share of the company as its gaming and embedded divisions suffer steep sales declines.
If Nvidia's history is any indication, this trend could continue for AMD. In Nvidia's fiscal first quarter (ended April 30), the data center division accounted for 87% of the company's revenue. That's a big change from two years ago, when data center sales barely surpassed those of the gaming division. This pattern suggests that AI chips could also become a major focus for AMD in the near future.
Currently, AMD's P/E ratio is 189, but using this metric to value AMD can be misleading as the company has only recently returned to profitability. The company's P/S ratio of 11 is well below Nvidia's sales multiple of 40. Assuming fast-growing data center revenue continues to account for a growing portion of the company's revenue, this could provide accelerating growth that could attract even more investors to AMD stock.
Will Healy invests in Advanced Micro Devices and Super Micro Computer. The Motley Fool invests in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
