You’ve probably heard about artificial intelligence (AI) this year and how investors should add AI-linked stocks to their portfolios. This has some advantages, but be careful when chasing the stocks that everyone is already talking about. There’s a good chance the stock everyone loves will disappoint you. It’s very difficult to be above average if you do something all otherwise it is.
Input Super microcomputer (SMCI -1.27%). The stock is less at the forefront of the public’s mind when it comes to AI potential than Nvidia (NVDA 2.33%) or Palantir (PLTR -0.54%), but its growth prospects and modest valuation make it an attractive stock idea worth considering. Here’s why.
Behind the scenes
AI seems to be everywhere these days, but ironically, super micro computers have been around since the early 1990s. The company specializes in the development and construction of large computer systems. More specifically, massive data centers that handle cloud work and other extremely demanding applications.
Think about it. Most companies are not in the computer business. You don’t know how to design, select, and assemble the many components to build a massive computer system, how to make it work, how to make it efficient, etc. Hire an expert who can create a turnkey system and sell you the solution is the smarter way.
Super Micro Computer has been in business for a long time. But today the company’s services are in high demand as companies simultaneously migrate to the cloud and need to invest in new technologies such as AI to remain competitive in their field. Growth has accelerated and sales have doubled in recent years.
Bright growth prospects at a moderate price
Wall Street has started to give Super Micro Computer stock more respect. Shares are up an impressive 200% this year. However, this could be due to a rising tide (AI hype) lifting all boats more than investors getting too invested in a famous name.
Consider names like Nvidia and Palantir below. You can see that each stock has a significant premium (higher P/E ratio) to Super Micro Computer. Yes, they also have higher expected earnings growth rates, but you can compare apples to apples by using the PEG ratio.
The PEG ratio of each stock is as follows:
- Super microcomputer: 0.6
- Palantir: 1.0
- Nvidia: 0.9
Super Micro Computer offers the best value for money when you consider how much you’re paying for each company’s expected future earnings growth. And it’s not that Super Micro Computer is an inherently bad company; The company generates an impressive 29% return on invested capital, signaling that it is generating a high return on every dollar invested. That means creating value for shareholders over time.
Buy Super Micro Computers for the long term
Every stock is subject to short-term volatility, especially when the share price fluctuates so much in less than a year. Still, Super Micro Computer has the makings of a long-term winner. AI spending has increased this year (see Nvidia’s results). Super Micro Computer’s management noted that the company grew five times faster than its industry in the last 12 months.
Is that a coincidence? Or do companies decisively choose Super Micro Computers to expand their computer investments? Experts believe the shift toward AI is just beginning, which could mean years of investment opportunities and growth for Super Micro Computer.
Investors should always approach a stock with a carefully considered plan, but it seems clear that Super Micro Computer stock hasn’t fully priced in its bright future.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.