Generative artificial intelligence (AI) uses large language models and other machine learning models to create text, images, video, audio, and computer code. Use cases range from digital assistants that improve worker productivity to intelligent avatars that make video games more realistic.
Bloomberg Intelligence expects generative AI revenue to exceed $1.3 trillion in 2032, up from $63.5 billion in 2023. In other words, Bloomberg estimates that spending on generative AI hardware, software, and services will increase 2,040% over the next nine years.
Some analysts see an even larger market. For example, a study by McKinsey & Company suggests that generative AI will eventually contribute $7.9 trillion annually to the global economy. Opportunities like this rarely present themselves, so investors should position their portfolios accordingly.
Nvidia (NASDAQ: NVDA) is a logical stock to own. In fact, I think most investors should have some exposure to the chipmaker. But Nvidia is by no means the only company that will benefit, and owning just one AI stock is a bad strategy. Here’s why I think Super microcomputer (NASDAQ: SMCI) is the best AI stock to buy right now.
Nvidia Dominates AI Processor Market
Nvidia’s graphics processing units (GPUs) have long been the gold standard for accelerating data center workloads, including artificial intelligence. That focus has intensified over the past year, as Nvidia’s revenue and net income have grown at triple-digit rates for four consecutive quarters. But investors should understand that Nvidia didn’t achieve its recent success by accident.
Nvidia has dominated the data center GPU market for nearly two decades, and the company has been setting performance records in MLPerfs — objective tests that measure how quickly AI systems can perform AI training and inference tasks — since the tests’ inception in 2018. One reason for this success is the CUDA programming language, which allows Nvidia GPUs (originally designed for computer graphics) to accelerate other data center workloads.
Nvidia launched CUDA in 2006, and the platform has since expanded to include hundreds of software frameworks and libraries that streamline data preparation, model training, and AI application development. No other chipmaker has a comparable supporting software ecosystem, so Nvidia has naturally become the leader in AI processors. To quote The Wall Street Journal“Nvidia chips underpin all of the most advanced AI systems, giving the company an estimated market share of more than 80%.”
The problem (if there is one) is valuation. Wall Street expects Nvidia to grow its earnings per share by 33% per year over the next three to five years. Dividing that by its current price-to-earnings ratio of 74 gives a price-to-earnings-to-growth (PEG) ratio of 2.2. That’s not outrageous. In fact, that multiple represents a discount to the three-year average of 3.1, so risk-tolerant investors should consider buying a small position today.
However, I think Super Micro (also known as Supermicro) is the better buy right now because the stock is much cheaper, but the company is likely to benefit greatly from companies investing in generative AI hardware.
Supermicro Gains Market Share in AI Servers
Supermicro builds accelerated computing platforms. Its portfolio ranges from individual servers and storage systems to full-rack solutions purpose-built for enterprise and cloud data centers. The company works closely with partners such as Nvidia, IntelAnd Advanced microsystems to equip its hardware with the latest chips.
Samik Chatterjee at JPMorgan Chase considers Supermicro the “leading company in the AI market.” More importantly, Supermicro is rapidly gaining market share. The company accounted for 10% of AI server sales in the quarter ended December, but KeyBanc’s Tom Blakely says that number could rise to 23% this year. He also believes Supermicro has “competitive moats that should maintain or even increase this share in the years ahead.”
Blakely is referring here to in-house manufacturing capabilities and a unique modular approach to product development. Engineers make up about half of Supermicro’s workforce, and the company handles most of its research and development in-house (in Silicon Valley). In return, Supermicro can bring new products to market quickly and efficiently, and its modular approach only enhances that capability.
Specifically, Supermicro is often first to market with new technologies because it can “rapidly assemble a broad portfolio of solutions by leveraging common building blocks across product lines.” In other words, the company can quickly outfit partially pre-assembled servers with the latest central processing units (CPUs), GPUs, memory, and interconnects, often beating competitors to market.
CEO Charles Liang recently highlighted this advantage: “We deliver optimized AI solutions at scale, delivering a time-to-market advantage and faster turnaround times compared to our competitors.”
Supermicro trades at a more reasonable valuation than Nvidia
According to 650 Group, annual AI server shipments are expected to increase six-fold between 2023 and 2028. Supermicro is well positioned to benefit from the increased demand, given its market leadership, supported by in-house engineering capabilities and a unique approach to product development.
Wall Street expects Supermicro to grow its earnings per share by 48% per year over the next three to five years. If that figure is divided by its current valuation of 47 times earnings, the result is a PEG ratio of less than 1. To be clear, Supermicro is not a hidden gem. In fact, it was the best-performing stock of the S&P 500 during the first half of 2024. But its valuation is very reasonable, especially compared to Nvidia’s PEG ratio of 2.2.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine holds positions in Nvidia. The Motley Fool holds positions in and recommends JPMorgan Chase and Nvidia. The Motley Fool has a disclosure policy.
Generative AI Sales Could Soar 2,040%: My Pick for the Best AI Stock to Buy Now (Hint: Not Nvidia) was originally published by The Motley Fool
