Artificial intelligence (AI) has done it Nvidia (NASDAQ:NVDA) With a whopping gain of 220%, the shares reached new highs this year and pushed the valuation of the semiconductor specialist well above the $1 trillion mark. However, another stock has posted even stronger gains this year thanks to AI.
Super microcomputer (SMCI -1.27%) It may not be nearly as famous as Nvidia, but it has delivered a stellar performance in the market, up 229% in 2023. Let’s look at why Super Micro stock has risen sharply and see if it can post stronger gains than Nvidia in 2024.
Booming sales of AI servers have given Super Micro a boost
The increasing adoption of AI applications has created the need for a new category of servers equipped with powerful GPUs (graphics processing units) and faster memory. These AI servers are faster than traditional data centers and enterprise servers because they have massive computing power, which is essential for training large language models (LLMs) and deploying generative AI applications such as ChatGPT.
However, due to their powerful features, these AI servers also generate a large amount of heat and consume more electricity. Accordingly CitigroupGPU performance in AI servers can be limited by improper heat dissipation and power consumption.
Therefore, electrical and cooling systems form an important part of the cost structure of a data center. While spending on cooling systems can account for 15% of a data center’s cost, electrical systems are said to account for 40% of the cost base.
This explains why demand for Super Micro’s modular AI server rack-scale solutions is increasing rapidly. A server rack is used by data center operators to store components such as routers, switches and other devices to optimize the functioning of the devices and also maintain proper air circulation to cool the systems.
Super Micro claims its plug-and-play server racks enable customers to quickly deploy AI servers while reducing power costs and offering liquid cooling solutions. The company currently has a production capacity of 5,000 racks per month, and the good thing is that the entire stock appears to be sold out. In the first quarter of fiscal 2024 (ended September 30), Super Micro’s revenue was $2.1 billion, up 14% year over year.
Management noted that the quarter was impacted by “GPU and key component shortages during our traditionally weak September quarter.” However, the company’s second-quarter outlook suggests even stronger growth. The company expects second-quarter revenue of $2.8 billion, in the middle of its guidance range. That would be an increase of 55% compared to the previous year.
The good thing is that Super Micro is seeing strong demand for its end-to-end liquid-cooled data center solutions thanks to increasing adoption of AI. The company said in its first quarter 2024 earnings call that it can offer its customers “a complete rack liquid cooling solution” with a “minimum lead time of approximately two weeks.” With the liquid-cooled data center market expected to grow 25% annually over the next five years, Super Micro appears to have a long-term growth opportunity.
The company expects its revenue to reach $10.5 billion in fiscal 2024, up 48% from 2023. Super Micro hopes the company will reach its annual sales target of $20 billion in the next few fiscal years by increasing its rack production capacity. Super Micro is expected to commission a new facility in Malaysia in the second half of fiscal 2024, which is expected to double its production capacity and generate annual sales of $30 billion.
How much upside can investors expect in 2024?
Super Micro expects sales of $10.5 billion in the current fiscal year, which is in the middle of its forecast range. For the 2025 fiscal year, analysts expect the company’s sales to be $13.4 billion.
Assuming revenue for the first six months of fiscal 2025 (ending in December 2024) is $6.7 billion (that’s half of what analysts expect for the full year), Super Micro generates in second half sales of $5.6 billion In fiscal year 2024 (determined by deducting the sales forecast for the first quarter and second quarter from the full year sales forecast of $10.5 billion), sales could be in the calendar year 2024 at 12.3 billion US dollars.
Multiply that by that S&P 500 The index’s sales multiple of 2.5 suggests a one-year market cap of nearly $31 billion, more than double the current market cap, suggesting that Super Micro stock is poised for a huge year next year Upside potential could be prepared. Meanwhile, according to 47 analysts covering the stock, Nvidia has an average 12-month price target of $650, which would represent an increase of 39% from current levels.
All of this means there’s a good chance Super Micro Computer will continue to outperform Nvidia stock in 2024. Given that Super Micro trades at just 2x sales even after the eye-popping gains it has posted this year, investors would do well to buy this AI stock for impressive returns in the new year and beyond to make profits.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in Nvidia and recommends it. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.