Both server manufacturers are flying high in the stock market thanks to growing demand for AI chips.
The market for artificial intelligence (AI) servers has taken off in the past year as cloud companies and data center providers invest in building their own AI infrastructure and developing generative AI applications. This explains why server manufacturers such as Dell Technologies (DELL 4.37%) And Super Microcomputer (SMCI -1.04%) They have seen their share prices explode.
While Dell’s stock price has nearly tripled in the past year, Super Micro, as it’s also known, has gained a total of 873 percent. But what is surprising is that both companies continue to trade at attractive valuations despite the spectacular rise in their stock prices over the past year.
So if you had to buy one of these two AI server plays right now, which would be the better bet? Let’s find out.
Case of Dell Technologies
Dell Technologies is a leading player in the global server market. According to third-party estimates, the company’s share of the overall server market reportedly stood at 19 percent at the end of 2022. So it’s not surprising to see why the company benefits from the growing demand for AI servers.
In the fourth quarter of fiscal year 2024 (ending February 29, 2024), Dell reported that orders for AI-optimized servers increased nearly 40% quarter-on-quarter. The company sold $800 million worth of AI servers last quarter. That figure should continue to grow, as Dell’s AI server backlog nearly doubled to $2.9 billion in the quarter. With the AI server market forecast to reach $150 billion in annual revenue in 2027, up from $30 billion last year, the market has plenty of room for deal growth.
It’s worth noting that AI servers currently make up a small portion of Dell’s overall business. The company delivered revenue of $22.3 billion in the fiscal fourth quarter, down 11 percent year-over-year. The year-over-year decline can be attributed to Dell’s Client Solutions segment, through which it sells personal computers (PCs) and workstations.
The PC market wasn’t in good shape last year, with shipments down nearly 14 percent from 2022. That explains why Dell’s client solutions revenue fell 12 percent year-over-year last quarter. The good news is that this segment could return to growth in 2024 thanks to the adoption of AI-powered PCs. Market research firm Canalys expects shipments of AI-enabled PCs to grow from 48 million units this year to 205 million units annually in 2028.
So Dell has two AI-related profit catalysts that will likely help it return to growth from the current fiscal year. The company projected revenue of $88.4 billion in fiscal 2024, down 14% from last year. However, as the following chart shows, its revenue will start to increase from FY 2025 onwards.
DELL revenue estimates for current fiscal year data via YCharts
The case of the supermicrocomputer
Super Microcomputer is a much smaller company than Dell. Its revenue in fiscal 2023 (which ended in June last year) was just $7.1 billion. However, being small means that sales of AI servers are moving the needle in a big way for Super Micro.
The company generated more than 50% of its total revenue last quarter from selling AI-related server solutions. That explains why the company’s revenue more than doubled to $14.5 billion in the current fiscal year. If half of Supermicro’s fiscal 2024 revenue comes from sales of AI servers, it will generate at least $7.2 billion in sales from this fast-growing market. This translates into a quarterly AI server revenue run rate versus Dell.
It’s also worth noting that Supermicro could double its revenue from current levels as it expanded its manufacturing operations to support more than $25 billion in annual revenue. The company is seeing a rapid increase in the utilization rate of its existing manufacturing capacity. “Our production utilization rate at our U.S., Netherlands and Taiwan facilities is approximately 65 percent, and they are filling rapidly,” Super Micro Management said on a January earnings conference call.
As such, it’s not surprising to see why consensus estimates are expecting Super Micro’s top-line growth to remain flat in fiscal 2024 and beyond.
SMCI revenue estimates for current fiscal year data via YCharts
It wouldn’t be surprising to see Supermicro exceed consensus estimates for fiscal 2026. This is because, in the words of management, “next-generation AI and CPU platforms are designed at a strong level from advanced data centers, emerging cloud service providers, enterprise/channel, and edge/IoT/telco customers. Wins, orders and backlogs keep running.”
Decision
I’ve already pointed out that SuperMicro’s small size is an advantage, as demand for its AI servers is growing much stronger than Dell’s. This explains why analysts forecast Supermicro’s earnings to grow at an annual rate of 48% for the next five years. Dell, meanwhile, expects almost negligible annual revenue growth over the next five years.
Of course, Dell’s fortunes could change, and its revenue growth rate could accelerate as its AI server business grows and its AI-powered PCs client business begins to grow. That’s why investors looking for a potential AI winner trading at an attractive price might want to consider buying Dell, as it’s trading at just 15.7 times forward earnings, less than Supermicro’s forward earnings of 36. Is.
However, we have seen that Super Micro is growing at a very fast pace, and as a result it can justify its high price. So growth-oriented investors can consider buying Super Micro on Dell, as its fast-growing nature can help deliver healthy gains over the long term.